Earn Your Allocation

Earn Your Allocation: Ken McArthur on pro-rata rights

Pro-rata rights let an investor keep its ownership by buying into later rounds. For seed investors, they can be the difference between a good fund and a great one. For founders, they can decide how much room is left for a new lead or a strategic partner. This month, that tension went public. Here’s what happened, what the terms usually look like, and what founders and GPs can do now.

What Happened: A Lawsuit With Two Accounts

On October 9, Valar Atomics CEO Isaiah Taylor posted an X Article, “Valar Atomics and Day One Ventures,” disclosing that Valar had sued its early backer in Delaware over Day One’s pro-rata rights in Valar’s Series B. That round was $1B at a $6B valuation, led by Sequoia, and closed August 3.

Taylor’s account, as reported by CiVL News, Grit Daily and Dealroom:

  • Day One invested $1M in the seed round and $15M in the Series A. Quoted by CiVL: “This leaves them with a total fully diluted ownership of less than 5%, but retaining Major Investor status.”
  • After Sequoia pre-empted the Series B, Valar asked its Major Investors to hold their allocations at zero so it could bring in one strategic insider without triggering a “spring-back” clause.
  • Taylor says everyone agreed except Day One. The day before closing, holders of a majority of the stock amended the Investor Rights Agreement to remove the clause.

Bucher’s account:

  • Day One backed Valar through the seed, a seed extension and a co-led Series A, and waived its pro-rata in the A extension.
  • She says Day One offered to give up most of its Series B pro-rata, and Valar instead demanded it give up its rights in all future rounds.
  • CiVL quotes her claim that Taylor responded, “You cannot make my life difficult, I can make your life difficult.”
  • She also raised a secondary share sale by Taylor that Day One says it was left out of.

These are allegations from both sides, and none have been tested in court. Axios reports that the Delaware Chancery Court will decide. We’re not taking a side here.

The Policy Change: Neo Drops Pro-Rata in Rounds It Leads

On October 11, Neo partner Connor Ling published “Why Neo Ditched Pro Rata Rights.” He wrote that since the start of 2026, Neo has “stopped including pro rata rights when leading priced equity rounds and removed perpetual pro rata rights from our standard SAFE side letter and Neo Residency side letter.” Neo keeps a limited participation right for SAFEs through the first priced round.

His argument comes down to a paradox: “they become most valuable when exercising them can create the greatest strain on the relationship.” And his conclusion: “Ultimately, venture capital is a relationship business.”

The Pushback: Seed Investors Say They Earned It

Seed investors answered quickly. Pejman Nozad: “We took the risk when nobody else would. Why should we give up the upside when everyone else wants in?”

Jason Calacanis argued that “angels and seed investors typically own .10% to 5%” and that there’s “zero downside to having them keep their pro rata.” He also said that “if early-stage folks can’t double down on their very small number of winners, they will not be able to raise subsequent funds.” These are his opinions, not data, but they explain why seed GPs care so much.

Axios’s Dan Primack summed up the split: “On one side are fiduciaries. On the other are founders and the founder-friendly.”

What the Terms Usually Say

Good public data on how often pro-rata is granted is scarce. The clearest figures I found are Canadian. In Osler’s 2025 Deal Points Report, covering Canadian venture deals done in 2025 and published in May 2026:

  • 94.7% of financings granted pro-rata rights to some, but not all, preferred shareholders, usually those who qualify as “major investors.” Only 5.3% granted them to all.
  • 22.9% of voting agreements used multiple approval thresholds, “up from 9.5% in 2024.” Osler links that to widening valuation gaps, especially in AI deals, “which increased economic divergence between existing and new investors.”

US practice may differ. But the pattern is useful: pro-rata is usually a privilege for a few investors, and new and existing investors’ interests can drift apart as valuations climb.

Why Insiders Matter More Right Now

New investors are hard to win over. On October 22, Harry Stebbings posted a 20VC clip saying fundraising is “back to being a numbers game”: “You have got to meet 100. It is like the old days.” The post doesn’t say who’s speaking in the clip, so treat it as a view, not a measurement.

And insiders matter when the money stops. Crunchbase News pulled together a list of 15 deals this year where well-funded startups that hadn’t raised equity in four or more years were acquired. Outcomes varied widely: Uber bought ezCater for $2.3B, 53% above its late-2021 pre-money valuation, while Airtable sold for $1.28B against an $11B valuation in 2021. It’s a hand-picked list, not a full count, but it’s a reminder that the people already on your cap table live with every outcome.

What Founders Can Do Now

  1. Read the fine print before you sign. Know your Major Investor threshold, who gets pro-rata, and whether there’s a spring-back clause.
  2. Raise allocation questions early and privately. Axios: “Founders don’t want to be known for breaching contracts.” The next investors you meet will have read the thread.
  3. Treat your insiders as your best reference. Existing backers who want to invest more are a strong signal to new investors. Keep them informed so they want to come back.

What GPs Can Do Now

  1. Remember your pro-rata is only as good as your standing with the founder. Keep earning it between rounds.
  2. Have the waiver conversation before the term sheet. Agree with founders in advance on how you’ll handle a pre-empt or a strategic allocation.
  3. Show LPs your record. Calacanis argues follow-ons in winners are how seed funds raise again. Show LPs where founders invited you back, not just what your documents say.

Contracts Get You a Seat. Relationships Get You Invited Back.

Whatever the court decides, the debate has already made one point clear. Neo says the founder’s wish to have you back beats the documents. The seed investors say they earned their place by showing up early. Both are describing trust.

Your investors’ co-investors, your advisors and your existing backers are the people who make the next round easier. ConnectLab.live maps those warm paths alongside your own contacts.

Connection is the currency of the 21st Century.

If one of your investors asked to double down tomorrow, would you say yes right away, and why?

If you’d like help with that, here’s an open invitation:

Sources

About Ken McArthur

Ken McArthur is the founder of ConnectLab.live, an AI relationship-intelligence and warm-intro platform that helps founders who are raising find the funds that fit and the people who can introduce them, and helps fund managers connect with the founders they back. He was recently accepted into Harvard Business School Foundry. He also writes Raise Smarter, a daily newsletter on what's really moving in early-stage fundraising. Ken challenges us to realize we ALL have an impact, whether we want to or not, on thousands of people we touch in our day-to-day lives, and he shows that simple things make a HUGE difference. ConnectLab.live grew out of that belief. Connection is the currency of the 21st Century, and the right introduction can change a company's future. Long before ConnectLab, Ken was the popular host of live events that brought together top-level marketers, entrepreneurs, business owners, corporations and non-profit organizations to build multi-million dollar joint venture relationships. He has managed product launches ranked in the top 400 sites on the Internet and is regularly asked to speak at leading marketing events. He created AffiliateShowcase.com, a pioneering affiliate program search engine and directory. He also founded the MBS Internet Research Center, which conducted the world's largest survey ever attempted on creating and launching successful information products. Ken was the official mentor for Sterling Valentine as he took his launch from zero to over $100,000 in less than 8 days, a proof of concept documented in Info Product Blueprint. Today he puts that same skill for connecting people and launching ideas to work for founders and the investors who back them.

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