Pro Rata Rights: What Good Founders Get Wrong
Some companies are like catnip for investors, be it traction, founders, or customers, there are plenty of fundraising rounds each year where demand vastly outstrips supply. In those situations, founders are often faced with the option to push out their earliest investors. Now I’m incredibly biased, but I think this is a mistake. Here’s why:
1. You Need Friends
Regardless of how hot your company is today, there will almost certainly be some tougher times ahead. During those moments, the folks who were interested when you were successful tend to disappear, and you really need your earliest believers to step up.
2. Repeat Behavior
If you ask investors you pushed out to add more capital in a later round, you will likely struggle, as they will know that if the good times return, you will push them out again.
3. Referrals
Most good investors understand this situation, and so they’re less likely to refer other investors and hiring candidates to your company. Which is often how they help most.
Best of luck out there.
Sterling Road invests in idea stage and pre-seed B2B startups based in the US, Canada and UK.
