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A Pro-rata side letter to Investment agreement protects investors' right to maintain their ownership percentage in future funding rounds. It's a common addition to investment deals in Canada's startup ecosystem, giving existing shareholders the opportunity to buy new shares before they're offered to others.

This letter spells out exactly how many new shares an investor can purchase when the company raises more money, typically matching their current ownership percentage. For Canadian companies, these rights help early investors stay meaningfully involved as the business grows, while following securities regulations under provincial authorities like the Ontario Securities Commission.

Consider adding a Pro-rata side letter to Investment agreement when your startup is raising its first significant investment round, especially from professional investors or venture capital firms. This document becomes crucial before finalizing any major investment deal that could lead to future funding rounds.

The timing matters most when dealing with sophisticated investors who plan to support your company long-term. Canadian startups typically add these rights during Series A rounds, though angel investors increasingly request them in seed rounds too. Having this agreement ready before closing investment shows professionalism and helps avoid rushed negotiations when the next funding round approaches.

• Basic Pro-rata Rights: The standard version of a Pro-rata side letter gives investors the right to maintain their ownership percentage in future rounds, typically with a simple participation formula.
• Enhanced Participation Rights: Includes additional provisions for overallotment options and rights to participate in different types of securities offerings.
• Super Pro-rata Rights: Allows investors to increase their ownership percentage beyond their current stake, often limited to specific funding rounds.
• Qualified Pro-rata Rights: Contains conditions or limitations based on minimum investment thresholds or investor qualifications under Canadian securities laws.

• Startup Founders: Sign and manage these letters as part of fundraising, balancing current investor rights with future funding flexibility.
• Venture Capital Firms: Often request Pro-rata side letters to protect their investment position and maintain meaningful ownership stakes.
• Corporate Lawyers: Draft and review the agreements to ensure compliance with Canadian securities regulations and protect client interests.
• Angel Investors: Negotiate these rights to secure their ability to participate in future rounds, especially in high-growth startups.
• Board Members: Review and approve these agreements as part of their corporate governance duties.

• Company Details: Gather current capitalization table, share classes, and existing investment agreements.
• Investor Information: Collect current ownership percentages and investment amounts for participating investors.
• Participation Terms: Define exact pro-rata rights, including any limitations or conditions on future participation.
• Timeline Parameters: Specify notice periods for exercising rights and deadlines for participation decisions.
• Compliance Check: Review provincial securities regulations and ensure alignment with existing shareholder agreements.
• Documentation: Use our platform to generate a legally sound pro-rata side letter that incorporates all these elements accurately.

• Identifying Information: Names, addresses, and legal status of both company and investor parties.
• Pro-rata Rights Definition: Clear formula for calculating participation rights in future rounds.
• Notice Requirements: Specific timeframes and methods for informing investors of new financing rounds.
• Exercise Mechanics: Detailed process for exercising pro-rata rights and payment terms.
• Term and Termination: Duration of rights and conditions for expiration.
• Governing Law: Explicit reference to applicable Canadian provincial laws and jurisdiction.
• Integration Clause: Connection to main investment agreement and other relevant documents.

A Pro-rata side letter to Investment agreement is often confused with a standard Investment Agreement, but they serve distinct purposes in Canadian business law. While both deal with investment terms, their scope and application differ significantly.

• Primary Function: Pro-rata side letters focus specifically on future investment rights, while Investment Agreements cover the entire investment relationship, including valuation, board rights, and initial share purchase terms.
• Timing of Use: Side letters are typically added to existing investment arrangements, while Investment Agreements establish the initial investment relationship.
• Scope of Rights: Pro-rata rights focus narrowly on maintaining ownership percentages in future rounds, whereas Investment Agreements establish comprehensive shareholder rights and obligations.
• Flexibility: Side letters can be easily modified or terminated without affecting the main investment terms, while changes to Investment Agreements usually require full stakeholder approval.