Ask a MoFo: NVCA - Pay-to-Play Provisions
This article is one in a series of articles explaining various terms commonly seen in term sheets issued by venture capital funds in connection with equity financings.
What are pay-to-play provisions?
As the name suggests, “pay-to-play” provisions require existing investors to pay (i.e., invest) in order to continue to play (i.e., maintain investor rights). Specifically, pay-to-play provisions usually require existing holders of preferred stock to purchase, on a pro rata basis, additional shares of the Company in a future financing. In the standard play-to-play scenario, if the investor does not reinvest, then some or all of its preferred shares will be converted to common stock or a more junior class of preferred stock (usually on a 1:1 basis). As a result, the investor may lose certain rights, preferences, and privileges associated with preferred stock, which may include the loss of a liquidation preference, a right to participate in subsequent financing rounds, a right to vote as a preferred stock holder in situations where the Company needs the preferred holders to approve certain material Company acts, and the right to elect a “preferred designee” to the board of directors, among other rights.
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