“VCs Are Playing Dirty: The Great Pro Rata Scam

Imagine being an early-stage investor in a hot startup, only to be left out to dry when the big guns come knocking. That’s what’s happening with pro rata rights, the little-known trick that VCs use to screw over smaller investors.

According to Root VC partner Lee Edwards, pro rata rights are not exactly “earned” but are instead a tool for VCs to maintain their ownership stake and avoid dilution. But what’s the real benefit for early-stage investors? Getting left behind by the very firms they trusted with their capital.

Enter the latest trend in VC investing: funds dedicated to helping seed VCs exercise their pro rata rights. Sounds innocent, right? Wrong. It’s a dirty game of wealth concentration, where the big VCs use their size and influence to muscle out smaller investors.

Take SaaS Ventures partner Jesse Bloom, for example. He’s making a killing by providing pro rata financing to early-stage investors, but only for those who are willing to surrender a significant chunk of their equity. It’s a sweetheart deal for Bloom, who gets to buy up cheap shares and cash in on the hype.

And it’s not just Bloom. The likes of Alpha Partners and SignalRank are also making a killing off the pro rata game. They’re not investing in companies; they’re buying up shares from desperate early-stage investors.

But don’t worry, founders! Your new lead investor will make sure to give you a seat at the table. And if they don’t, you can always ask Bloom or his competitors to help you out. After all, what’s a few billion dollars in losses when you’re trying to change the world?

Meanwhile, the SEC is just looking the other way, allowing this madness to continue. And why not? The bigger the valuations, the more juice there is for the venture capitalists.

As Jason Calacanis would say, it’s time for the power players to step up and demand fairness. But don’t hold your breath. The pro rata game is all about who has the most power, and the early-stage investors are getting trampled.”