What Is Pro Rata and How to Use a Pro Rata Calculation Table

So you’re investing in startups. You have a solid portfolio and can spot a good founder. You’re navigating term sheets, valuations and funding rounds like a pro. But then you hear this term—pro rata. What is pro rata? And why does it matter to you as an angel investor?

Imagine you invest early in a startup and your stake is a decent chunk of the company. As the startup grows it needs more funding and new investors come in. Your ownership percentage shrinks unless you put in more money to maintain your share. That’s where pro rata comes in. It’s your chance to keep your piece of the pie as the company scales.

In this blog, we’re going to answer the following questions—what is pro rata, how to calculate pro rata, and how to calculate pro rata on cap table. Moreover, there are going to be some demonstrations of pro data calculation table for startups. Let’s break it down.

What Is Pro Rata?

“Pro rata” is Latin for “in proportion”. It’s a way to divide something fairly. Think of it like ordering a pizza with friends. If you paid for half you should get half the slices, right? That’s pro rata in action.

In the startup world, pro rata applies to ownership and future funding rounds. When you invest in a startup you own a percentage of the company. So, as the company grows and raises more money, new investors come in and ownership stakes get diluted. Pro rata rights allow you to maintain your ownership percentage by investing more in future rounds.

Why Pro Rata Matters to Angel Investors

Startups raise multiple rounds of funding. The early investors who get in at a lower valuation benefit the most if the company succeeds. However, as new investors come in your ownership shrinks unless you invest more.

That’s where pro rata rights come in. They give you the option (not the obligation) to keep your ownership percentage steady. If the startup is doing well, exercising pro rata can help you maintain your stake and maximize returns.

How to Calculate Pro Rata

Let’s get to the numbers. If you want to calculate pro rata here’s the basic formula:

(Your current ownership percentage) x (new shares issued) = Number of shares you need to buy

Let’s say you invested early and own 5% of a startup. Now the company is raising a new round and issuing 1,000,000 new shares. To keep your 5% stake you need to buy:

5% x 1,000,000 = 50,000 shares

If you don’t buy those shares, your ownership shrinks. You’ll still have the same number of shares, but your percentage ownership will drop as the total share count increases.

Pro Rata Calculation Table

To make things easier, here’s a quick pro rata calculation table. This will help you estimate how many shares you need to buy to maintain your stake.

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This table is a simple way to check your pro rata commitment when a startup raises a new round.

How to Calculate Pro Rata on Cap Table 

A cap table (short for capitalization table) is a document that tracks a company’s ownership. It shows who owns what percentage of the company at any given time.

When new shares are issued in a funding round, the cap table updates to reflect the new ownership breakdown. If you exercise your pro rata rights, your percentage remains the same. If you don’t, your ownership shrinks as new investors come in.

Here is a demonstration of how to calculate pro rata on cap table for a startup: 

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Now the startup raises a new round and issues 1,000,000 new shares. The new cap table will look different.

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If you buy your pro rata shares (50,000), your percentage stays the same (5%). If you don’t, your ownership drops to 2.5% instead of 5%. That’s why, understanding how to calculate pro rata on a cap table is crucial.

What If You Don’t Have Pro Rata Rights?

Not every angel investor gets pro rata rights. Some deals don’t offer them. Some startups may not honor them. Some venture capital firms negotiate “super pro rata” rights that allow them to buy even more than their fair share, squeezing out smaller investors.

If you don’t have pro rata rights, you’ll need to negotiate for them upfront. If you can’t get them, make sure you’re comfortable with the possibility of dilution.

Additional Considerations in Pro Rata Investing

Pro rata rights sound great, but should you always use them? It depends on several factors:

• Company Growth: If the startup is showing strong traction, exercising pro rata can be a smart move. However, if the growth is stagnant or uncertain, you may want to reconsider.
• Valuation Changes: If the company’s valuation has skyrocketed since your initial investment, the price per share will be much higher. You’ll need to evaluate whether the investment still makes sense at this new valuation.
• Investor Priorities: Your own investment strategy matters. Are you focused on doubling down on existing investments or would you rather diversify into new startups?

Being strategic about when to exercise pro rata rights can make a big difference in your returns.

Risks of Pro Rata Investing

While pro rata rights can protect your ownership they come with risks:

• Over-Investing in Underperforming Startups: Not every company you invested in will become the next big success. If you blindly exercise pro rata rights on every investment, you might end up putting more money into startups that don’t have a strong future.
• Capital Constraints: Pro rata investments require additional funds. If you commit too much to pro rata rounds, you may run out of capital for new opportunities.
• Super Pro Rata Dilution: Venture capital firms sometimes negotiate the right to buy more than their original share, which can kick out smaller investors from follow-on rounds.

Investors should assess each pro rata opportunity against their portfolio strategy before committing more capital.

Pro Rata Strategy

To get the most returns, investors should think through pro rata rights. Here are some tips:

• Focus on High-Performing Startups: Use pro rata rights selectively on the companies with strong revenue growth, customer traction, and market potential.
• Set Aside Follow-On Capital: Have capital set aside for pro rata rounds so you’re not caught off guard, when a good opportunity arises.
• Monitor the Cap Table: Keep an eye on how new funding rounds impact ownership percentages. Sometimes even with pro rata rights, dilution can happen due to additional investor preferences.

Pro rata rights are a valuable tool, but only if used strategically. Balancing new investments with follow-on funding is key to a successful angel portfolio.

How Pro Rata Fits Into Your Investment Thesis

Pro rata rights shouldn’t be exercised blindly. They should align with your overall investment thesis. Here’s how:

• Portfolio Diversification: Investing more in an existing startup means you have less capital for new investments. Make sure you’re balancing pro rata opportunities with new investments.
• Risk Assessment: Before doubling down, reassess the startup’s growth, revenue, and market position. If the business isn’t growing as expected, holding off might be better.
• Exit Opportunities: Think about the long term exit strategy. If the company is on a clear path to an acquisition or IPO, increasing your stake might be good. If not, tying up more capital could limit your future options.

Conclusion

Pro rata might sound like a technical term, but it’s a simple concept. It’s about keeping your share in a growing company. If a startup you invested in is doing well, exercising pro rata can help protect your stake and increase returns.

So next time you see a funding round happening, check your pro rata rights, run the numbers and decide if it’s worth doubling down. Pro rata is just one of the tools in the angel investing toolbox. If you want to learn more about startup investing, check out Angel School’s Venture Fundamentals course. You’ll learn how to evaluate deals, cap tables and build a portfolio. Keep learning, keep growing, keep investing!