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A Pro-rata side letter to Investment agreement gives existing investors the right to maintain their ownership percentage in future funding rounds. It's a common addition to investment deals in the UK startup ecosystem, protecting investors from having their shares diluted when new investors come on board.

This side letter typically kicks in during new funding rounds, giving current shareholders first dibs on buying additional shares. For example, if you own 10% of a company, you'll have the right to invest enough to keep that 10% stake when the company raises more money. Under English law, these rights are legally binding and commonly appear alongside standard investment terms.

Use a Pro-rata side letter to Investment agreement when you're making a significant early-stage investment in a UK startup and want to protect your ownership stake in future funding rounds. It's particularly valuable for angel investors and venture capital firms who plan to participate in multiple funding rounds and want to maintain their influence over company decisions.

The timing is crucial - these rights need to be secured during your initial investment negotiations. Without them, your ownership percentage could be severely diluted in later funding rounds, even if the company becomes highly successful. Many UK investors consider these rights essential for any investment exceeding £50,000, especially in high-growth tech startups.

• Full Pro-rata Rights: Gives investors the right to participate in all future funding rounds, maintaining their exact ownership percentage
• Capped Pro-rata Rights: Limits participation rights to specific funding rounds or up to a maximum investment amount
• Qualified Pro-rata Rights: Only activates when certain conditions are met, like minimum investment thresholds or specific company milestones
• Time-Limited Pro-rata Rights: Rights expire after a set period or specific number of funding rounds
• Selective Pro-rata Rights: Allows investors to choose which funding rounds to participate in while maintaining rights for future rounds

• Venture Capital Firms: Primary users who request these rights to protect their investment position across multiple funding rounds
• Angel Investors: Individual investors who need to maintain their ownership percentage and voting rights in promising startups
• Corporate Law Firms: Draft and negotiate the terms of pro-rata rights on behalf of investors or companies
• Startup Founders: Must understand and agree to these terms, balancing investor rights with company flexibility
• Company Secretaries: Manage compliance with pro-rata rights during subsequent funding rounds and maintain shareholder records

• Initial Investment Details: Gather exact investment amount, share class, and current ownership percentage
• Participation Scope: Define which future funding rounds will trigger pro-rata rights and any investment caps
• Notice Requirements: Specify how and when the company must notify investors of new funding rounds
• Time Limits: Set clear deadlines for investors to exercise their pro-rata rights
• Existing Agreements: Review main investment agreement to ensure pro-rata rights align with other terms
• Shareholder Approval: Check if existing shareholders need to approve these new pro-rata rights

• Parties and Definitions: Full legal names of investor and company, plus clear definitions of key terms
• Pro-rata Rights Scope: Precise description of rights to maintain ownership percentage in future rounds
• Trigger Events: Specific funding rounds or circumstances that activate pro-rata rights
• Notice Requirements: Process and timing for company to inform investors of new investment opportunities
• Exercise Period: Clear timeframe for investors to exercise their pro-rata rights
• Governing Law: Explicit statement that English law governs the agreement
• Execution Block: Signature spaces for all parties with dates and witness provisions

A Pro-rata side letter to Investment agreement differs significantly from a standard Investment Agreement. While both deal with investment terms, they serve distinct purposes and operate differently in practice.

• Scope and Purpose: Pro-rata side letters focus specifically on future investment rights, while Investment Agreements cover the entire investment relationship, including valuation, share classes, and voting rights
• Timing of Use: Side letters typically come into play during subsequent funding rounds, whereas Investment Agreements govern the initial investment terms
• Legal Structure: Side letters supplement the main Investment Agreement, making them more flexible and easier to modify without affecting core investment terms
• Complexity Level: Pro-rata side letters are usually shorter and more focused, dealing with just one specific right, while Investment Agreements are comprehensive documents covering multiple aspects of the investment relationship