What is Pay-to-Play Provision?

A Pay-to-Play provision is a term in a venture financing that requires existing investors to participate in subsequent funding rounds (i.e., "pay") in order to retain their preferential rights (such as liquidation preferences and anti-dilution protection) from the earlier round.

Base Term for Startups: This is a founder-friendly term. It incentivizes investors to continue supporting the company in future rounds, especially in challenging times. If an investor decides not to participate, their preferred shares may be converted to less favorable common shares.

For Investors: This term can be seen as punitive, as it forces them to invest more capital or risk losing the valuable rights they negotiated in the initial investment.

Base Term Example: A startup is raising a difficult "down round". A Pay-to-Play provision in the original term sheet forces an early investor to participate, helping the company get the round closed.