Are pro rata rights and early investor commitment good or bad for founders?

Sarah Tavel · May 6, 2024

Pro rata rights are wrong as a default; investors should have to 'earn' pro rata by doing work, because uninvolved investors demanding pro rata create unnecessary conflict and extra dilution for founders

The venture business model pushes founders to optimize rounds for a new lead's ownership requirements while past investors demand their pro rata, dilating founders further; dilution is only justified when the investor is creating work, and accountability should follow contribution

Scope: she is more ownership-sensitive than most firms at the initial investment; would still like to invest more when the founder wants it

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David Frankel · Oct 14, 2024

Pro rata rights are the original sin against entrepreneurs and are bad for founders in both good and bad outcomes

Founders are handing VCs a free option against themselves; if the company is killing it pro rata doesn't matter, and if it's struggling the founder becomes a stalking horse for existing investors while later-stage investors demanding 20% ownership force extra dilution

Scope: irrelevant when metrics are off the charts

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Harry Stebbings · Oct 14, 2024 · hedged

Being the first to commit with conviction often just gets you used as a stalking horse to win the founder a better price or structure, so the value of first-mover conviction is questionable

Founders' job is to get the best round, so an early committed investor becomes a price-setting tool

21:19 Early committed investors are exploited as a stalking horse for better terms

David Frankel · Oct 14, 2024

Existing investors showing unbridled enthusiasm — for example via uncapped pre-round notes to their best-performing companies — works as testimonial marketing that helps the founder raise the next round

Early investors' visible enthusiasm is a selling point into the next round

21:47 Existing investor enthusiasm via uncapped notes functions as testimonial marketing for the next round