Pay-to-Play
A provision requiring investors to participate in future rounds or lose their preferred stock rights.
Definition
Pay-to-play provisions require existing investors to invest their pro-rata share in future funding rounds to maintain their preferred stock rights. If an investor does not participate, their preferred shares are converted to common stock (losing liquidation preferences and anti-dilution protections). This provision is meant to prevent investors from free-riding on their existing protections while others fund the company's growth.
Why it matters
Pay-to-play is good for employees. If investors refuse to invest more, their preferred stock converts to common, removing their liquidation preferences. This means more exit proceeds go to common stockholders (including you).
Example
A Series A investor has pay-to-play. In the Series B, they decline to invest their pro-rata share. Their Series A Preferred converts to common stock, losing the $5M liquidation preference. In a $30M exit, that $5M now gets shared among all common holders.