Pro rata rights allow investors to retain their percentage ownership in future rounds on the same terms as new investors. This enables them to avoid dilution that occurs as the company raises more money. However, pro rata rights are not always honored or some early investors are asked to give up their pro rata rights to make room for new investors.
As Fred Wilson writes, it’s becoming more common that pro rata rights are not honored in later stages of financing (especially when a company is doing well) as the amount of allocation available for later investors becomes small. This cuts into the returns of early stage funds (like First Round Capital) and causes conflict between the earliest investors and the later ones.
Today, most early investors will ask for and mostly expect to get pro rata rights. This is counter to the solution some investors propose—founders should be mindful of who they give the right to. Practically speaking though, since pro rata rights can be taken away, the right is re-earned each round by helpful investors (helpful beyond just the capital put in).