Calculate the pro-rata cash ask before allocating the funding round

Before asking existing investors to fund their share of a round, have counsel identify the applicable rights, eligibility thresholds, covered securities and notice requirements. Do not assume every holder has identical participation rights. Side letters and earlier agreements may produce different allocations or deadlines.

Y Combinator's fundraising glossary describes pro-rata rights as contractual rights allowing a holder to maintain its percentage ownership in later rounds. Applying that idea requires the actual contract definition. The CFO's immediate task is to turn the agreed entitlement into an accurate cash request and a financing allocation the company can close.

Assume a hypothetical holder has 20% of the relevant pre-round capitalization and is entitled to maintain that percentage. Ignore pool changes, convertibles and different security prices. If the total round is fixed at $5 million, the holder supplies 20%, or $1 million, while the remaining investors supply $4 million.

If outside investors have instead committed $5 million before this holder participates, the answer changes. Let the holder's contribution be x. To provide 20% of the final new money, x must equal 20% of the sum of $5 million and x. Solving gives $1.25 million from the holder and $6.25 million total. Adding $1 million to a fixed $5 million outside commitment would not preserve the assumed percentage.

Suppose the company has ten million existing share equivalents, the holder owns two million and the financing price is $2. In the fixed-total case, $5 million purchases 2.5 million new shares. The holder's $1 million buys 500,000, leaving it with 2.5 million of 12.5 million equivalents, or 20%.

If the holder declines and other investors fill the same $5 million round, it retains two million of 12.5 million equivalents, or 16%. That outcome assumes the round still fills; a declined allocation does not itself create replacement cash. Present ownership and funding shortfall as separate consequences.

For the fixed-outside-money case, $6.25 million purchases 3.125 million new shares. The holder buys 625,000 and owns 2.625 million of 13.125 million equivalents, again 20%. Reconcile both examples by shares as well as dollars so the model catches an ambiguous round-size instruction.

Create a participation schedule showing entitlement, amount requested, response deadline, accepted subscription and funded amount. Have counsel direct how unused allocations may be offered to others. An investor's interest in taking more than its entitlement is a separate request, not proof that the company may assign that amount immediately.

Ask the lead investor whether additional existing-holder participation increases the round or reduces the lead's allocation. Then update both cash proceeds and ownership. A negotiating discussion can otherwise promise the same portion of the round to two investors or leave management budgeting more cash than the agreed round permits.

If the pricing denominator changes through a pool expansion or conversion, rerun the entitlement under the contractual definition. Maintaining an old percentage may require a calculation different from simply multiplying the new cash target by that percentage.

Use the participation schedule to track evidence of acceptance, required approvals and receipt of cash. Keep verbal interest separate from signed and funded commitments. Agree which spending decisions wait for the minimum usable proceeds the company needs.

Send final allocations to counsel and the closing team, then reconcile issued shares and funds received to the approved version. This process gives management an accurate capital total without making a recommendation about whether any particular investor should participate.