Venture’s chivalric myths

Venture’s chivalric myths

Pro rata, launching Otter Health, NYC Movie Screening

Yoni Rechtman

Oct 16, 2026

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My view of pro rata has always been that it’s a legal fiction because “what are investors gonna do, sue you to invest in the business?”

Turns out, yes!

In either version of the story (both parties insist it’s actually the other one suing them), the game suddenly became non iterative and the reputational costs went either way down or to zero.

Either the company sued because they know she’s done and no one cares: easy prey with blood in the water. Or the investor sued the company because this is her last bite at the apple / last chance to make money. If you’re blackballed from the industry already, may as well try to max exposure to a hot name on the way out.

Either way, we see how it’s cultural / social norms and the expectation of playing again that keeps behavior in check, not law. We all have to engage in the fiction that it matters. But as ever,

venture is an iterative game until all of a sudden it’s not!

See also:

last week

.

You never know when the person you might otherwise screw over or behave unethically in front of might be on the up or at least be in network with those who are. So everyone has to manage their reputation for the sake of long term profits, sometimes to the detriment of maximizing their short term P&L.

In the main this mostly works.

So startups have developed this extra legal chivalric system of chits and norms to govern deal making. It’s reminiscent of early modern European credit systems and gift culture, where contributions are recorded publicly as evidence of your good works and character - not unlike East Coast style philanthropy.

At least until it’s time to take profits or, as is increasingly common, the dollars get so big and so global as to transcend mere “startups.”

My operating assumption is that agreeing to these terms is useful for expectation setting around future negotiations, but if I’m relying on legal docs to secure my access, something has gone terribly wrong along the way / I have not done my job.

I’ve

written before

about how I don’t really believe in buying preferred shares and would be happy to buy common shares at a lower price than everybody else in the round:

I'd happily buy common stock at a discount. And founders should be willing to sell it to me - less chance of them walking away with $0 in a mediocre outcome AND they’d increase their de facto control.

The problem is that founders basically don’t care about common vs pref. Like VCs, Founders ALSO only care about upside. So even though the downside protection through liq pref is worth something greater than 0, founders won’t accept a lower price in exchange for giving it up.

The same thing is true here. I’m happy to have no contractual pro rata rights and instead rely on how much you like me if you’re willing to let me invest at a lower price (because,

obviously, pro rata is an option, and options have premiums

). I would rather price the option and buy my equity naked, trusting my relationships to let me buy more.

Once again, I’m sure no one will take me up on this.

Notably, we’re starting to see the option get priced the other way with

Thrive having a literal call option on OA

I and

SoftBank at one point effectively having a put

.

Hunter Walk

summarized

why this is a bigger problem than it’s been in the past and why it’s gonna be a bigger, not smaller problem over time:

Seed funds have gotten big enough that they want/need to do their pro rata across multiple rounds

Outliers can be 10-100x bigger than last cycle, so a Series B or C is still a 20x+ bet in the best case

Hot secondaries and SPVs mean you can flip or fund pro rata you can’t hold yourself, so it’s “a trade as much as an investment”

Rounds come faster, so more of them land inside a fund’s initial investment period

In Silicon Valley’s chivalric culture the legal rights mean very little because no one would dare exercise them. In global capitalism’s rules-based system, they mean everything.

The two are now in conflict. Historically pro rata was low value and socially enforced and financialization is making it real and legally enforced. The supra-legal chivalric code that governs startups is clashing with the increasingly financialized reality of modern private technology markets.

It’s a cottage industry no longer.

Launching Otter Health

Most healthcare “innovation” is zero-sum at best, negative-sum at worst. Prior authorization (PA) is when payers (insurers) make providers (doctors and hospitals) get approval before they’ll pay for a treatment. The prior auth automation/arms race is exemplary of the problem. You automate getting through hoops so payers build new hoops. Both sides spend more on admin despite the “efficiency.”

AI is making it worse. We know that rote AI workflows are making healthcare admin more expensive (

BCBS estimated

an additional $1B in costs from AI medical coding alone).

PHTI found

that AI is cutting prior auth costs for individual payers and providers but not for the system, and risks making the whole process more activity-intensive rather than more efficient. And PA isn’t even catching bad care: in Medicare Advantage (Medicare plans run by private insurers) only 11.5% of PA denials get appealed, but

over 80% of those appeals win

.

At best PA is the wrong tool and at worst it’s the enemy of an efficient healthcare system.

That’s why we invested in Otter Health, which launches today with $8M co-led by Fika Ventures and Evidenced. Read more in

Fierce HC

.

Lots of people have tried “simplifying” or “improving” prior auth but it’s always been for a unilateral customer (the payer, the provider, the pharma company), so it just shifts surplus from one side to the other instead of reducing waste and spend.

Otter obviates the need for PA by replacing it rather than trying to “fix it” by engaging in the arms race with more tokens and intelligence.

Otter gives payers and providers a shared, real-time view of care decisions against the clinical evidence, so a plan can remove PA and still see whether care stays appropriate. That reaches well past PA: over 60% of spending on low-value care (care the evidence says doesn’t help patients) never goes through PA at all, and Otter has shown it can keep decisions that go against clinical guidelines under 5% without PA.

Otter is working with multiple large health plans and provider groups already and we’ll have more to share on the customer front soon. Keith and Amol are repeat founders who’ve lived this problem. We wouldn’t have backed it if they weren’t who they are.

The long term opportunity here is to build FICO for healthcare: reputation and scoring that powers payments, transactions, and trust. Once there’s transparency and efficient transactions (already a huge opportunity) the payment substrate of healthcare can finally modernize.

I’ve written before that my personal blackpill is that there are very few novel ideas for positive-sum systemic change in healthcare. Otter is a genuinely important, rare one in the biggest market in the biggest economy in the world.

See also,

Positive sum HC

You Can See Everything

Next week we’re hosting a screening of You Can See Everything, the Elizabeth Holmes / Nathan Fielder movie in NYC.

Really excited to get together with our friends and mutuals for this. Movie of the year?

Sign up here: https://luma.com/a24wsu6p

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