Pro-rata side letter to Investment agreement Template for the UK
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What is a Pro-rata side letter to Investment agreement?
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.
Sample clauses: standard wording in a UK pro-rata side letter to investment agreement
2. Pro-Rata Participation Right
2.1 Subject to clause 3, if at any time the Company proposes to issue any New Securities, the Company shall procure that the Investor is offered the right to subscribe for such number of New Securities as is required to enable the Investor to maintain its Equity Proportion immediately following the issue, on the same terms and at the same price per share as those offered to the other subscribers.
2.2 The Company shall give the Investor written notice of the proposed issue specifying the number, class and price of the New Securities, the identity of any proposed subscriber and the expected completion date, and the Investor may exercise its right under clause 2.1 by written notice to the Company within [10] Business Days of receipt of that notice.
2.3 For the purposes of this letter, the Investor's "Equity Proportion" is the percentage of the Company's issued share capital held by the Investor on a fully diluted basis immediately before the relevant issue, being [10]% at the date of this letter.
2.4 The rights in this clause 2 are in addition to, and shall be applied before, any pre-emption rights conferred on the Investor by the Articles or the Investment Agreement, and the Company shall procure that any statutory pre-emption rights under section 561 of the Companies Act 2006 are disapplied only to the extent consistent with this letter.
3. Excluded Issues and Termination of the Right
3.1 Clause 2 does not apply to the issue of shares or other securities under an employee share option plan approved by the Board, on the conversion of any convertible loan note in issue at the date of this letter, in consideration for a bona fide acquisition approved by the Board, or otherwise as agreed in writing by the Investor.
3.2 The rights conferred by this letter shall terminate automatically on the earlier of an Exit, the Investor ceasing to hold at least [3]% of the issued share capital of the Company, and the [fifth] anniversary of the date of this letter.
3.3 This letter is personal to the Investor and may not be assigned or transferred except to an Affiliate of the Investor or to a fund managed or advised by the Investor's manager, in each case on written notice to the Company.
Illustrative extract showing typical drafting under the law of England and Wales. Documents generated with GenieAI are tailored to your rules, standards and context.
Frequently Asked Questions
When should you use a Pro-rata side letter to Investment agreement?
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.
What are the different types of Pro-rata side letter to Investment agreement?
- 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
Who should typically use a Pro-rata side letter to Investment agreement?
- 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
How do you write a Pro-rata side letter to Investment agreement?
- 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
What should be included in a Pro-rata side letter to Investment agreement?
- 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
What's the difference between a Pro-rata side letter to Investment agreement and an Investment Agreement?
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
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About the Pro-rata side letter to Investment agreement
- 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
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