What it is: Pay to play is a provision that requires existing investors to participate in subsequent funding rounds to maintain their pro-rata ownership stake. It ensures that existing investors continue to invest in the next financing rounds to protect their interests.
Why it is essential: Pay-to-play provisions help maintain investor alignment and protect the interests of early investors. It ensures that existing investors can maintain their ownership percentage in the company and prevents dilution of their investment. Pay-to-play provisions also signal to new investors that existing investors have confidence in the company's growth prospects.
Formulas: There are no specific formulas associated with pay-to-play provisions.
How to use it in the context of startups: Startups can include pay-to-play provisions in their investment agreements to secure ongoing support from existing investors. By including this provision, startups ensure that early investors continue to invest in subsequent funding rounds, providing ongoing capital and signaling confidence in the company's progress. Pay to play provisions protect existing investors' interests and stabilize future fundraising efforts.
