Deal Terms
Pay-to-Play
A provision requiring existing investors to participate in future down rounds or lose certain rights — typically conversion rights on preferred stock.
Pay-to-play provisions require existing investors to participate (invest) in future financing rounds — particularly down rounds — or lose certain preferential rights. Investors who don't 'play' (invest their pro-rata share) have their preferred stock converted to common stock, losing liquidation preferences, anti-dilution protections, and other preferred rights. Pay-to-play protects founders and new investors by ensuring existing investors with special rights are putting new capital at risk, not just free-riding on their historical protections. In severe down rounds, pay-to-play can force out investors who won't or can't continue to fund the company. The provision is most relevant when a company needs capital and some early investors have check sizes too small to continue participating meaningfully.