Pay-to-Play Provisions

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