Pro-rata allow investors to buy more shares to maintain their ownership in future financing rounders. Here's an example:
Investor A purchases a post-money SAFE for $1,000,000 on $10,000,000. Before the equity round, Investor A owns 10% of the company ($1,000,000 / $10,000,000)
The company raises an equity round and takes in $5,000,000 on a $20,000,000 pre-money valuation from new investors.
Without a pro-rata, Investor A would be diluted by 25% from the new money in the round (25% = $5,000,000 / $20,000,000). Investors A maintains her 10% ownership by purchasing 10% of the shares in the equity round.
Option Pool Dilution: Many equity rounds increase the size of the option pool. Ex: The available option pool was previously 6%. The term sheet for the equity round requires increasing the equity pool to 10%. The equity pool size is calculated relative to all the shares in the company after the new round.
Investor A's pro-rata protects against dilution from the new money investment. However, Investor A is still diluted by the equity pool increase. In the example above, Investor A would be diluted by 4%.
SAFE Investors without pro-rata are diluted by the new money investors at the Series A and the option pool increases
SAFE Investors with pro-rata are only diluted by the option pool increases