It’s time to hold investors accountable and abolish pro-rata

Since I was pounding the pavement on Sand Hill Road as a youngentrepreneur in the late 90s, VC has changed a lot.

It was difficult to get capital, and founders had to beg for it. Our funding options were limited to a few blue-chip firms and networks of successful angels. Equity capital has become a commodity as more money is flowing from more sources than ever.

It's not uncommon to hear the sentiment that VCs have to work to sell their money in today's market. In the era of value-add venture capital, investors need to show that they will do more for the founders than just give them a check. It's a change of power, and the sales pitch these VCs give to founders is that they'll be with them every step of the way.

The hard way is that these value-add services have a short lifespan.

We found that even the best-intentioned investors rarely provide much value-add beyond 90 days from when they signed the term sheet. The investor's engagement is limited to their attendance at the quarterly board meeting and the lead investor.

While many VCs may think of themselves as financiers, they ultimately provide a service to their founders.

Many of the other participants don't give any value beyond their check. 20% of cap table contributors don't help their founders make strategic connections, based on what our founders told us. They throw their money in a pot.

In a world where investor money flows freely, the VCs that don't provide value-add are dead weight. When it comes time to raise a new round, they invariably invoke their contractually negotiated pro-rata rights. Their presence on the cap table makes other VCs work harder for their founders.

If they both keep a spot at the table, why should they do more for their founders?

This is the way it has always worked and it isn't a good excuse. It is time for founders to insist that their investors provide continued support as they scale their company. It is time to abolish pro-rata rights.

The pro-rata clause guarantees an investor the right to maintain their equity stake in the company by investing in future rounds. There is no requirement for the investor to hit a certain number of points for their founders. The deal includes pro-rata rights.

Pro-rata is a privilege that VCs take for granted. The right to invest in future rounds should be contingent on demonstrating value-add, as capital is now a commodity. It's a new type of pro-rata granted to investors that brought more to the partnership than capital.