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Comment by nikhizzle | Hacker News Reader

One thing not mentioned here is that for very tiny investors, pro rata is a right that can protect against aggression from later, more highly resourced funders.

If the company is scaling quickly, and looks like it could have a good return, a later stage investor could come in and cause massive dilution in the cap table by issuing many shares and granting some amount to the employees and founders. If I had pro rata, I could have a proportional share of the funding, and even if in the likely case I didn’t have the capital I could likely raise it, and at least get some share of the upside.

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I was thinking of this myself. What protects against this except for pro-rata? I am a relatively ignorant bystander to the workings of VC but even I’ve heard it’s possible for dilution (and other adverse outcomes)to be counteracted for certain recipients by issuing new shares. Basically without pro rata and board control it seems you can “reset” the cap table at will?

Companies plus VCs do it to employees all the time too. You often get told in joining “you’re getting x% of the company with back of the envelope calculation if we sell for y that would be worth x% of y”, but few founders are honest about the whole “except for the fact that by the time we sell you’ll probably have been diluted in so many rounds that it’ll by nowhere near x%” part.

Especially if the company struggles and has down-rounds, and even more if the company introduces classes of shares with preference etc. they also generally won’t sign a contract that protects employees from that ever too, so you’re not at the negotiating table, you don’t provide any capital and the only reason they have not to completely screw you is if they want to retain staff.

Even if it’s looking pretty, the final round can involve a certain amount of mathematical trickery.

This is a ridiculous situation. Why would you possibly plow more money into a company that is actively adversarial against you?

If a company tries to screw you like this, you have shareholder rights. If you are a big enough fish that you are getting into crazy financing battles like this, then you are not the target audience for this post.

That's not necessarily the case here. When the investor in this example makes the initial investment, they are factoring in the possibility of failure and weighing that the compensation for this is the ability to participate in upside in the case of success. If they don't get a right of first refusal to participate in subsequent funding their upside is capped because a big investor will come in and want to take down the entire round (I have been involved in several funding situations and big investors very often want to do this in my experience). They will be left with a tiny stake and don't get to share in subsequent growth.

The whole VC ecosystem would change if investors knew on their losing bets they would take the full loss and on the winners their upside would be hard capped because they wouldn't be able to follow on. It would be much harder for companies to get funding in that world.

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