[HN Gopher] Pro rata is a bad term for founders
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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!
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