Pro-rata Rights For Angels

Joanne Wilson (aka Gotham Gal) has an outstanding post today titled Pro-rata rights. In it she makes two important points about angel investing.

  1. She won’t do a deal if the legal documents aren’t good.
  2. She won’t do a deal if she doesn’t get pro-rata rights.

She then goes on to discuss a thing that happens continually in VC deals. When VCs invest in rounds, they set a threshold for “major investors” and, if you aren’t a major investor, you lose your pro-rata rights. In Joanne’s case, she hates this because her angel strategy is to maintain her pro-rata through the life of the company.

As a VC investor, I always insist on pro-rata rights. I did also when I invested as an angel, although my angel strategy was to invest in only the first two rounds. As an angel, I’d do the seed round, then one more round if needed, and then I’d stop. Occasionally I’d do a later round, especially if my investment was needed for positive signaling, or if it was a down round because of some circumstance, but I still believed in the company.

I know many VC investors who aggressively cut angels out of the pro-rata rights in later rounds. I’ve ended up deals where that’s in the docs, almost always driven by someone else. I’m generally indifferent – I’m delighted to have angels continue to participate if they want, and not if they don’t (my personal syndication agnostic view that I’ve talked about on Feld Thoughts many times.)

As an angel, it’s important to know the lay of the land and how it coud impact you in the future. Joanne does an awesome job of laying to the issue of pro-rata rights in this post – go read it now.

  • I just finished reading Joanne’s post and commented on it and then i see you just published post. Both posts are must reads for angel investors

  • How does tech stars handle this issue?

    • TechStars doesn’t have pro-rata rights. They look like a founder – simply have common stock.

  • Financial education (and, as that develops, sophistication) is the key. I’m wondering where investors (especially single angel investors) may typically go to speed up their financial education curve in regard to investments? What are the best type of informational resources in that regard? Brad, you did a phenomenal job of that, with Jason, for entrepreneurs in “Venture Deals”, but it needs to become a more central part of the ecosystem. As “knowledge is power” we also each have a responsibility to self-educate if we want to lead a life, and be involved with businesses, to maximum benefit.

  • As a seed investor I can say we are always happy to give our co-investing angels the exact same rights as us. The only way to do seed rounds IMHO

  • AnnGMorrone