[HN Gopher] Pro rata is a bad term for founders ___________________________________________________________________ Pro rata is a bad term for founders Author : akharris Score : 40 points Date : 2021-10-11 14:47 UTC (8 hours ago) (HTM) web link (blog.aaronkharris.com) (TXT) w3m dump (blog.aaronkharris.com) | sytse wrote: | One possible reason for pro-rata term that I don't see mentioned | is preventing dilution due to an underpriced round. But since | most of the time investors have to agree anyway to a new round | that seems a minor concern. | akharris wrote: | Do you mean in a down round or just a round at a low price? | | In my experience, any down round requires massive changes to | ownership across the cap table, previous rights or not. The | only way to stop this is with even more onerous terms that one | doesn't normally see in VC term sheets. | drinkzima wrote: | This seems odd to write, as [I believe] YC has one of the | strongest, least-founder-favorable versions of pro rata. YC sets | so many market terms for startups, they could change this | dynamic. | drinkzima wrote: | Specific terms that offer pro rata re-assignment at YC | discretion: | | "Neither this Agreement nor the rights contained herein may be | assigned, by operation of law or otherwise, by Investor without | the prior written consent of the Company; provided, however, | that this Agreement and/or the rights contained herein may be | assigned without the Company's consent by the Investor to any | other entity who directly or indirectly, controls, is | controlled by or is under common control with the Investor, | including, without limitation, any general partner, managing | member, officer or director of the Investor, or any venture | capital fund now or hereafter existing which is controlled by | one or more general partners or managing members of, or shares | the same management company with, the Investor." | pedalpete wrote: | I think this is exactly why the post was written. Aaron isn't | saying that YC has a great pro-rata program. I took his | writing as stating that he thinks it needs to be | reconsidered, and that it is bad as it currently stands. | drinkzima wrote: | Yep, odd is probably the wrong word, I just find the | specific transferability term egregious. | JumpCrisscross wrote: | > _the specific transferability term egregious_ | | Why? It has to do purely with the fund's internal | structure. Affiliate transfers shouldn't have any | material effect on a company. Withholding automatic | affiliate transfers would be the company creating | needless work for itself. | berberous wrote: | That seems like a boilerplate right to assign to affiliates, | not unaffiliated third parties or LPs. Not sure why you find | that problematic? | [deleted] | JumpCrisscross wrote: | > _Crazy! This is valuable term! Investors should have to pay | more to get it_ | | On the flip side, I'd love for a founder to give me a discount | for agreeing to take out these boilerplate terms I have--as an | angel investor--zero interest in adversarially leveraging. | akharris wrote: | I like this! | | I guess the founders would mostly argue that boilerplate is the | price of admission for angels these days. But it would be great | to see it work this way. | eftychis wrote: | The thing is accounting for the risk and the lack of liquidity | and opportunity cost I don't think it is worth coming to the | table for most investors without pro rata. That's from my own | calculations and some others posted here and there. Essentially, | if you don't have pro rata or something equivalent to bet more on | the winning horse the rational decision would be to place money | in the stock or commodities market honestly with much less risk. | | But yeah you should pick an investor according to what you want-- | help and advice as part of the package is valuable and good | investors and advisors give it openly. | | Curious of course on feedback on this -- do other people get | different numbers? P.S. Maybe that is the idea for this post from | someone from YC? Push away other future investors? :D | hstern wrote: | Completely agreed. Current pro rata rights are mostly a legal | fiction that mostly harm founders with less experience or | leverage. The right should be explicitly negotiated! ___________________________________________________________________ (page generated 2021-10-11 23:00 UTC)