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A Pro-rata side letter to Investment agreement gives existing investors the right to maintain their ownership percentage when a company issues new shares. In India, startups and growing companies commonly use these letters to protect early investors from dilution during future funding rounds.

This document specifically outlines how many new shares an investor can buy in upcoming rounds, typically matching their current ownership level. For example, if an investor owns 10% of a company, the pro-rata rights let them buy enough new shares to keep that 10% stake. Under Indian Company Law, these rights need to align with SEBI guidelines and must be clearly documented alongside the main investment agreement.

Use a Pro-rata side letter to Investment agreement when bringing early-stage investors into your Indian startup, especially during Series A or seed rounds. This document becomes crucial if you anticipate multiple funding rounds and want to keep your initial investors engaged and protected through your company's growth journey.

It's particularly valuable when dealing with strategic investors who bring expertise beyond capital, as it helps retain their long-term commitment. The timing matters - add these rights during the initial investment negotiation, not after. Many Indian startups include pro-rata rights when raising capital from angel investors, venture capital firms, or family offices who expect to participate in future rounds.

• Full Pro-rata Rights: Grants investors the right to maintain their exact ownership percentage in all future funding rounds, commonly used by major venture capital firms in India
• Pay-to-Play Pro-rata: Requires investors to participate in future rounds to keep their pro-rata rights, often seen in competitive startup ecosystems
• Capped Pro-rata: Limits the right to specific funding rounds or total investment amounts, popular among angel investors
• Qualified Pro-rata: Only activates when certain conditions are met, like minimum investment thresholds or regulatory approvals under SEBI guidelines

• Venture Capital Firms: Primary beneficiaries who use these letters to protect their investment value across multiple funding rounds in Indian startups
• Angel Investors: Early-stage investors who secure pro-rata rights to participate in future rounds and maintain their ownership stakes
• Corporate Legal Teams: Draft and review these agreements to ensure compliance with SEBI regulations and Companies Act provisions
• Startup Founders: Negotiate and sign these letters while balancing investor rights with company flexibility for future fundraising
• Investment Bankers: Advise on structuring these rights during fundraising rounds and help coordinate multiple investor interests

• Investment Details: Gather current capitalization table, investment amount, and share price from the main investment agreement
• Ownership Percentages: Calculate existing shareholding percentages and determine pro-rata participation rights for future rounds
• Future Round Terms: Define which funding rounds trigger pro-rata rights and any participation thresholds or caps
• Compliance Check: Review SEBI guidelines and Companies Act requirements for investor rights documentation
• Notification Process: Outline how and when investors will be informed about future investment opportunities
• Timeline Clarity: Specify response periods for exercising pro-rata rights and payment deadlines

• Reference Details: Clear identification of the main investment agreement and parties involved
• Pro-rata Rights Definition: Specific terms outlining participation rights and calculation method for new share allocations
• Trigger Events: Detailed conditions that activate pro-rata rights, such as new funding rounds or share issuances
• Notice Requirements: Procedures for informing investors about new opportunities and response deadlines
• Governing Law: Explicit reference to Indian law and relevant SEBI regulations
• Execution Clause: Proper signing format with company seal requirements under Companies Act, 2013
• Integration Clause: Statement linking this side letter to the main investment agreement

A Pro-rata side letter to Investment agreement differs significantly from an Investment Agreement. While both deal with investment terms, they serve distinct purposes in India's startup ecosystem.

• Scope and Purpose: Pro-rata side letters focus specifically on future investment rights, while Investment Agreements cover the entire investment relationship, including valuation, voting rights, and exit provisions
• Timing of Use: Side letters are typically added to existing investment agreements when specific investors need pro-rata rights, whereas Investment Agreements are the foundational documents signed at the initial investment
• Legal Standing: Side letters supplement the main Investment Agreement and only address pro-rata participation rights, making them more flexible to modify without affecting core investment terms
• Complexity Level: Pro-rata side letters are generally shorter and more focused, dealing with just one aspect of investor rights, while Investment Agreements are comprehensive documents covering multiple aspects of the investment relationship