Managing Startups: Best Blog Posts

Chapter 47. Super Pro-Rata Rights Aren’t Super

David Beisel

I recently received a email from an entrepreneur I know with a genuine question about the terms of his financing: “How do you guys at NextView feel about one of our investors holding super pro-rata rights for the next round?” We at NextView Ventures have recently seen super pro-rata rights introduced by other investors in a couple of the rounds in which we’ve participated, and we have started to see a pattern emerge of the consequences of this insertion.

On the subject of super pro-rata rights, a couple of months ago Brad Feld wrote a blog post called “Just Say No,” and Mark Suster (after detailed explanation of both pro-rata rights and super pro-rata rights) summed up that the reason not to take them is that “you might make it difficult for you to get your company funded in the next round.” Mark’s argument is essentially that they make the entrepreneur’s next fundraise more difficult because of the signal value associated with whether or not the existing VC investor is going to exercise those pro-rata rights.

But the reason that super pro-rata rights aren’t super goes beyond just how the VC with those rights acts as the next round approaches. These rights fundamentally misalign incentives on how the company is operated, which is bad for both an entrepreneur and the VC. The rationale for the negative effects of super pro-rata rights comes down to VC math, in which the latter of the three dimensions ...