Fundraising & Equity
Pay-to-Play Provisions
Collated by Harry Prabandham
Curated by Rubric Financial
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What Pay-to-Play Does
- Pay-to-play requires existing investors to participate in a future financing round (usually pro-rata) or face penalties on their existing shares
- The penalty is typically conversion of preferred shares to common stock — losing liquidation preferences, anti-dilution protection, and board seats
- This prevents 'free-rider' investors who enjoy downside protection from preferences but refuse to support the company when it needs capital most
- Pay-to-play is most valuable during difficult markets when some investors may want to preserve capital rather than follow on
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