Follow-on rounds occur when the company holds a subsequent round of funding and issues additional shares. This issuance will dilute the relative percentage ownership of all existing investors (including FundersClub) if they do not participate in all follow-on rounds. If follow-on rounds continue to occur at higher valuations than previous rounds (“up-rounds”), even if the relative percentage ownership declines through non-participation, the value of the holding will continue to appreciate. If follow-on rounds occur at a lower valuation than previous rounds (“down-rounds”), anti-dilution provisions may, but do not always, kick-in to partially protect shareholders from onerous dilutive effects.
FundersClub seeks pro-rata rights and to make available investment in follow-on rounds to FundersClub members whenever possible. However, as is typical in the venture capital industry, pro-rata rights are not always negotiable and follow-on investment cannot always be made available to existing investors.