What are the pros and cons of allowing an investor to have super pro-rata rights?
There is no Pro. You are giving an investor an option to buy even more of your company … without any corresponding obligation to do so.
But, let’s step back for a minute.
The internet is full of binary advice.
Super pro-rata rights are not “good” for the company.
But if that’s the offer you have — and you can’t negotiate it out — you may want to take it.
You may hate the fact you agreed to the super pro-rata rights later. These super-pro rata rights likely will have to be painfully renegotiated if you raise a real venture round later (maybe the #1 reason not to do it — the work you’ll have to do to “fix” this problem later may be very painful).
I’ve had to do that myself when I invest, make it a requirement super pro-rata rights are extinguished. Because otherwise, there would be no room for new investors.
But it’s all a negotiation, folks. Every term has some economic consequences and trade-offs. There are no “don’t ever agree” terms in my mind. There are just terms you want to avoid if you have options. And there are terms that are “standard” that make life easier for everyone (super pro-rata is not standard).
But if you only have one term sheet, and you need the money, and that investor, in their mind, wants the right to buy more later, at whatever price is determined later … you may want to take it.
I wouldn’t let the company go down the drain over this.