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What are Supra Pro-Rata Rights?

Q: Can you explain what supra pro-rata is? It seems to be showing up in some VC term sheets now. What’s the impact on the entrepreneur? How hard should one try to negotiate it out? If a VC insists on this term, should the entrepreneur walk away?

A:  (Jason)  First of all, for those of you who want a refresher on pro rata rights, see our prior post on it here.  As for what is “supra pro-rata” it is a multiple of a 1X pro rata right.  So, if I own 10% of the preferred, I normally will have the right to buy 10% of any future securities issued by the company.  With a supra pro-rata right it is normally 1.5, 2 or 3X. In our example, a 2X supra pro rata right would allow me to buy 20% of the next round.

This isn’t a very common term, unless you are dealing with very early / seed stage financings.  You’ll see in some cases where a VC seed funds a deal with a small amount of money.  It is normally the intention of the VC to lead the first real venture round, but in order to protect itself (in case the entrepreneurs decide to take funding from someone else), the VC will ask for a supra pro rata right.  Although the seed deal doesn’t represent a lot of money, it does represent a lot of the VCs time, so they want to make sure that they can stay in the deal.

If your financing is a “regular” full blown round, then I would say this is a rare term. 

As for my advice on “walking away,” there are very few terms that I consider “walk” terms.  If you need the money and don’t have other options, get the money. 

(Because I know that I’ll get the question, if I was on the entrepreneur side, I’d walk from poor valuation, overly aggressive liquidation preferences, over bearing board and voting controls and VC board members who expect compensation to join your board). 

June 16th, 2007 by     Categories: Term Sheets