Pro Rata Rights for Angel Investors? Yes Please
When Channel Angels considers funding technology startups, one of the items we request is “pro rata” rights. The approach ensures that we remain aligned with our portfolio companies when they seek future rounds of funding.
What exactly are pro rata rights? Let’s assume the following hypothetical example:
Your business — called Acme Company — is seeking to raise $3 million in seed funding. As part of that $3 million seed round, you seek $250,000 in funding from Channel Angels.
During our due diligence process, we become impressed with your vision, management team, target market, intellectual property and strategic plan for execution.
At the same time, you see value in Channel Angels’ member experience in and across the IT channel ecosystem.
We ultimately agree on deal terms and deal valuation, and we write one check for $250,000 to help round out your $3 million seed round.
Pro Rata Rights Explained
So far, so good. The one extra step we’ll request is pro rata rights — which allows Channel Angels to maintain our initial level of ownership percentage during during your future financing rounds. Basically, we’re saying “give us the opportunity to write you additional checks” for your follow-on rounds (Series A, Series B, and so forth).
Admittedly, there’s a chance we may not exercise those pro rata rights. Our decision process involves our overall portfolio at any given moment, near-term investment pipeline, your company’s latest performance and business prospects, and plenty more.
At the same time, some startups avoid offering pro rata rights for a range of reasons. But in many cases, experienced angels and venture capitalists will avoid such deals because they want to avoid potential dilution in later rounds.
Example Follow-On Round Participation
In our case, we’ve participated in multiple follow-on funding rounds because of our continued enthusiasm for numerous companies in our portfolio. Examples include backing:
Brelyon, a next-generation immersive PC display, for its seed and Series A rounds.
Rewst, a robotic process automation (RPA) software startup, for two early seed rounds.
Trash Butler, a subscription service for apartment complexes, for 2019 and 2021 rounds.
Side note: Special thanks to Propel(x) and Florida Funders for their work introducing our angels to those investment opportunities.
As Channel Angels looks ahead to 2023, we expect to make additional pro rata investments across our portfolio of companies.