Pay to play is often used in terms sheets.

A pay to play clause is intended to create an incentive for existing preferred share investors to invest on a pro rata basis in future financing rounds. The clause spells out that, if the existing investors choose not to participate in future rounds, they will lose some or all of their preferential rights.

For example, if a preferred investor in a down round chooses to invest then he maintains his anti-dilution rights. If he chooses not to invest, then he loses those rights.

Other disincentives for not participating include
– Losing some preferred rights.
– Losing all preferred rights and protections, such as forcing the investor into common stock.

If you fail to pay, then you can’t play.

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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.