In the startup context, "pro rata" commonly refers to the proportionate allocation of something, based on an investor's share or stake in a company. Below are some examples:
- Investment Rounds:
- When a startup raises subsequent funding rounds (after an investor has already invested), existing investors have a "pro rata right" to participate in that round. This means they have the right, but not the obligation, to invest additional money to maintain their percentage ownership in the startup. This is especially valuable if the startup is performing well, as it allows early investors to continue to invest and not have their ownership stake diluted.
- Distribution of Proceeds:
- If a startup decides to issue dividends (which is rare for early-stage companies), they would be distributed "pro rata" based on the number of shares each investor or shareholder holds.
Common stock does not sound exciting. Preferred stock does. First-time founders are looking for excitement—especially when it comes to their millions of initial shares—and so they’re often surprised to hear that they’ll be receiving common, rather than preferred stock when the startup is incorporated.