A question we often get from our startup founders is “what is the minimum check size to get pro-rata rights in an angel investment?” Sometimes, founders will just give everyone who participates in the early rounds pro-rata rights. Now, that’s super nice of them but I wouldn’t recommend that. So let’s dive into this question and its answer.
Instead, what we see most of the time is that there is a threshold for something called a “major investor.” This is in the fundraising documents. All major investors get pro-rata rights going forward.
Typically, the threshold to become a major investor is $100,000 check size in angel seed deals.
Now, it can be higher, it can be 500K. It can be lower, it could be 50K. But $100,000 is typically the average we see most of the time.
You might be asking yourself, why do pro-rata rights matter so much?
Well, they matter because it allows you, in the future, to keep putting more money in the company to protect your ownership position.
So, you are an angel investor and you own 1% in a great seed-stage startup. It becomes the next Uber or Facebook, something huge like that. Being able to protect your ownership and keep 1% of that company is incredibly valuable over time.
Instead of being diluted down, you can just keep pumping money in. Whether you need to beg, borrow or do whatever you need to get that check to invest in the next Facebook or Uber along the way, you’re going do it.
So that’s why people care about pro-rata rights so much.
Again, $100K is typically the threshold where founders and the other investors will let someone have pro-rata rights in the future. Hope that helps, thanks!