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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 commonly used by Kiwi startups and growth companies to protect early investors from having their shares diluted when new investors come aboard.

These letters play a vital role in New Zealand's venture capital ecosystem, especially under the Financial Markets Conduct Act 2013. They ensure initial backers can participate in subsequent capital raises on the same terms as new investors, helping maintain a balanced and fair investment structure. Most angel investors and VC firms consider pro-rata rights essential for their investment strategy.

Use a Pro-rata side letter to Investment agreement when bringing early investors into your New Zealand startup or growth company. It's particularly valuable when you anticipate multiple funding rounds and want to maintain strong relationships with initial backers who might otherwise hesitate to invest without future participation rights.

These letters become essential during Series A preparations, when early investors need assurance about their future investment opportunities. They're commonly used alongside convertible notes and SAFE agreements in the Kiwi startup ecosystem. Angel investors and venture capital firms often require pro-rata rights before committing capital, making these letters crucial for successful early-stage fundraising.

• Full Pro-rata rights: Give investors the right to participate in all future funding rounds, maintaining their exact ownership percentage. Most common in early-stage Kiwi startups.
• Capped Pro-rata rights: Limit participation rights to specific funding rounds or investment amounts. Often used with angel investors.
• Qualified Pro-rata rights: Only activate when certain conditions are met, like minimum investment thresholds or company valuation targets.
• Major investor Pro-rata rights: Reserved for investors meeting specific investment thresholds, common in Series A+ rounds.

• Early-stage Investors: Angel investors and venture capital firms who want to protect their ability to participate in future funding rounds.
• Company Founders: Startup leaders who negotiate and sign these agreements to secure initial investment while managing future capital structure.
• Corporate Lawyers: Draft and review the letters to ensure compliance with NZ securities laws and Financial Markets Conduct Act requirements.
• Board Members: Review and approve pro-rata rights as part of their governance responsibilities.
• Investment Managers: Negotiate terms and monitor compliance with pro-rata rights for institutional investors.

• Investment Details: Gather initial investment amount, company valuation, and share class information.
• Ownership Structure: Document current cap table and anticipated future funding rounds.
• Rights Parameters: Define pro-rata participation terms, caps, and any qualifying conditions.
• Legal Requirements: Review NZ Financial Markets Conduct Act compliance needs.
• Investor Information: Collect complete details of participating investors and their investment entities.
• Timeline Planning: Set notification periods for future rounds and response deadlines.
• Document Integration: Align with main investment agreement terms and existing shareholder rights.

• Parties and Definitions: Full legal names of company and investor entities, plus key terms defined.
• Pro-rata Rights: Clear specification of participation rights and calculation method.
• Notice Requirements: Timing and format of future funding round notifications.
• Exercise Period: Deadlines for investors to exercise their pro-rata rights.
• Qualifying Conditions: Any thresholds or requirements to maintain rights.
• Term and Termination: Duration of rights and circumstances ending them.
• Governing Law: Explicit reference to New Zealand law and jurisdiction.
• Execution Block: Proper signature sections for all parties.

A Pro-rata side letter to Investment agreement is often confused with an Investment Agreement, but they serve distinct purposes in New Zealand's startup ecosystem. While both deal with investment terms, their scope and application differ significantly.

• Primary Purpose: Pro-rata side letters focus specifically on future investment rights, while Investment Agreements cover the entire investment relationship, including initial terms, voting rights, and exit provisions.
• Timing and Scope: Pro-rata letters are forward-looking documents protecting future rights, whereas Investment Agreements govern current investment terms and conditions.
• Complexity: Pro-rata side letters are typically shorter, focused documents dealing with a single right, while Investment Agreements are comprehensive documents covering multiple aspects of the investment relationship.
• Legal Standing: Pro-rata letters supplement the main Investment Agreement, acting as an addendum rather than a standalone agreement under NZ securities law.