What is Pay-to-Play?
A provision that penalizes existing investors who don't participate in a future round - usually by converting their preferred to common.
Pay-to-play provisions require existing preferred investors to keep funding their pro-rata share in down or distressed rounds. Investors who don't 'play' lose privileges: their preferred stock may convert to common (stripping liquidation preference and anti-dilution), or convert to a shadow series with weaker terms. The mechanism forces insiders to either support the company or give up their protective rights. Why it matters to you: in a hard round, pay-to-play can be a founder's friend - it pressures passive investors to either re-up or convert to common, which cleans up the preference stack and aligns everyone around survival. It usually shows up in recapitalizations and bridge financings when the company needs every existing investor to lean in.
Example
- A down-round term sheet says non-participating preferred holders convert to common. An early investor either writes a fresh check or loses their 1x liquidation preference.