Rights that can kill your returns

Hello friends, and welcome to The Unsophisticated Investor! Brought to you by Scott & Rob, the founders of Shuttle!

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Now, let’s get into it 👇

Hey folks! Now that the dust is settling on the launch we’re back to our regular programming. This week we’ll look at two important concepts in venture capital that affect your rights as an investor: pro-rata and information rights.

Before we begin, a couple of definitions:

• Dilution: When your percentage ownership in a company decreases because new shares are issued.

• Term sheet: A non-binding document, provided by a VC firm, outlining the key terms and conditions of a potential investment before the legal contracts are finalised.

Let’s first take a look at pro-rata rights. Pro-rata rights, also known as pre-emption or participation rights, are provisions that allow existing investors to maintain their percentage ownership stake in a company through subsequent funding rounds. Here’s a quick example: If a VC firm initially acquires, say, 10% of a startup, pro-rata rights give them the option to invest again in each new funding round, buying just enough additional shares to maintain their 10% ownership as new capital is invested into the company.

Pro-rata rights are very valuable to investors because it allows them to preserve the influence and economic upside they secured in earlier rounds, without dilution from future fundraising. Typically pro-rata rights are negotiated at the term-sheet stage and can be a key element in ensuring that early backers can continue to participate in a company’s growth trajectory.

Now let’s take a closer look at information rights. In a sentence, information rights are contractual provisions that grant investors access to specific financial and operational information about the companies they invest in. These rights give investors access to regular financial statements, budgets, business plans, and performance reports. This ensures the investor can monitor the company’s progress and maintain transparency over their investment.

As we constantly say, Venture Capital is a high risk/high reward asset class where many companies don’t make it. That’s why it’s important to know which companies are doing well and which aren’t. Your information rights can be invaluable when deciding whether to exercise your pro-rata rights, maintain ownership in your winners, and avoid being diluted.

It’s important to note that these rights, both pro-rata and information, are generally not rights afforded to angel investors writing smaller cheques. But, by investing as a group through companies like Shuttle, you’ll have a much stronger chance of securing these rights. By pooling capital and investing as a single entity, companies like Shuttle can negotiate on your behalf, holding far greater leverage during negotiations, thanks to the pooled capital.

That’s all for this week folks, we hope you learned something today!

What we’ve been working on at Shuttle

• We launched 🚀

• Have already closed all legals for our first investment 🔒

• Working on finalising legals for the second investment now 📑

• Back to sourcing our next investment opportunities 🔎

• Planning our next product releases for 2025 ✨

The Unsophisticated Investor is brought to you by Scott & Rob, the founders of Shuttle. We’re both sick of private markets being a playground exclusive to the ultra-wealthy so we started a company to challenge the status-quo. Shuttle’s singular focus is to unlock private markets for Millennial and Gen Z retail investors and help them build wealth through the highest performing private market opportunities.

Scott & Rob
Shuttle Co-Founders