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What is a SAFE Pro Rata Rights Agreement?
A SAFE Pro Rata Rights Agreement is a letter by which a company gives pro-rata rights to a SAFE investor. By using a SAFE Pro Rata Rights Agreement, a SAFE investor has the right to purchase more shares in a company if the company raises a further round or rounds of financing. The rights under a SAFE Pro Rata Rights Agreement are only exercisable after the SAFE has converted into preferred shares of the company at equity financing.
What is a Simple Agreement for Future Equity (SAFE)?
A Simple Agreement for Future Equity (SAFE) is a contract by which an investor makes a cash investment into a company in return for the rights to subscribe for new shares in the future. Under a Simple Agreement for Future Equity (SAFE), the investment is converted into equity when there is an “equity financing”, a “liquidity event”, or “a dissolution event”. Contrary to a Convertible Note, a Simple Agreement for Future Equity (SAFE) does not carry interest, does not expire, and does not specify a minimum amount of funds to be raised at the equity financing.
What is the main purpose of a SAFE Pro Rata Rights Agreement?
The main purpose of a SAFE pro-rata rights agreement is to provide an opportunity to the investor for maintaining their percentage of equity stake and voting power. For example, if an investor has a 20% of equity stake in a company, then they will be provided with an opportunity to maintain their current equity stake during the next round of the company financing. When a company issues new shares to raise the fund, an investor stake in a company will decrease because of the increase in the number of shares, as a result of their voting power also gets decreased while comparing the stakes on a percentage basis. So, to avoid this situation an investor is provided an opportunity to invest more to maintain their current percentage of stake in a company whenever a company issues new shares for further rounds of financing, which is known as pro-rata rights or venture capital financing.
On what basis are pro-rata rights calculated?
Pro-rata rights can be calculated in three different ways: on a percentage, dollar-for-dollar, or fixed-sum basis.
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Percentage basis is the most common one. Here, investors get the right to maintain ownership percentage by continuously investing more capital in all the rounds.
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Dollar-for-dollar basis is not very common. It gives investors the right to invest the same amount or lesser than what they invested before.
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Fixed-sum basis is not that widely used. Here, investors who have received a pro-rata on a fixed-sum basis continue to maintain the right to continuously invest an amount as agreed upon that is decoupled from the investment amount.
Conclusion
Pro rata rights are the rights of the SAFE investor to purchase more shares in the company if the company raises a further round or rounds of financing. These rights are only exercisable after the SAFE has converted into preferred shares of the company at the equity financing. For example, if you execute a SAFE prior to Series A financing, the SAFE is converted into preferred shares of the company at Series A. With the pro-rata rights, the investor will be entitled to purchase more shares if the company raises a Series B financing, at the same price and on the same terms as the Series B investors. By using a SAFE Pro Rata Rights Agreement, a SAFE investor can maintain their percentage of equity and voting power in a company.
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