Participation Rights or Pro Rata Rights or Rights of First Offer (ROFO)

A right for existing Investors to take part in future financings up to their pro rata percentage ownership in the Company. This allows an Investor to not lose their degree of control in the Company when fundraising happens in the future. Otherwise, a new Investor could come in and take significant portions of the Company, thus diluting the earlier Investor’s shares.

Example: Earl E. Investor invested $20 million in The New Company in 2018, receiving a 15% share of the business, along with the right to participate pro rata in future rounds. In 2020, The New Company decided to do a new round and sell more shares. Earl now has the first crack at maintaining his 15% share of the Company by buying enough of the new shares until he again owns 15% of the Company. Note that Earl must still pay the Company for those shares at the price offered to other investors in the new round (e.g. they are not available to him at any discount). If Earl doesn’t have the money or doesn’t want to exercise his rights, he misses out and the opportunity to purchase these new securities will be opened to other Investors.

Term Sheet Language: All [Major] Investors shall have a pro rata right, based on their percentage equity ownership in the Company (assuming the conversion of all outstanding Preferred Stock into Common Stock and the exercise of all options outstanding under the Company’s stock plans), to participate in subsequent issuances of equity securities of the Company (excluding those issuances listed at the end of the “Anti-dilution Provisions” section of this Term Sheet and shares issued in an IPO). In addition, should any [Major] Investor choose not to purchase its full pro rata share, the remaining [Major] Investors shall have the right to purchase the remaining pro rata shares.