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Finance Glossary

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Pro Rata Rights


When a company is raising money, there can be some tension because of dilution.

Let's say you invest a lot in your Aunt Wilma's yarn business when she's just getting started, and you get shares that give you 33% of the company's ownership. But the business is a hit and Wilma is expanding. She launches additional efforts to raise funds. She sells more shares, and now you only own 15% of the company's ownership. You're miffed. What about all the money you ponied up when no-one else believed in the project? What about all those times you listened to her rants about lint?

Pro rata rights address some of these problems (not the lint problems—you're on your own there). Pro rata rights give you the right to invest in future offerings so that you can hold onto the same percentage of the ownership you had before. You don't have to invest at later stages, but if you decide to you get first crack at it—before the general public.