What is a pay-to-play provision?

A pay-to-play provision penalizes existing investors who decline to invest their pro rata share in a subsequent (usually down) round — typically by converting their preferred stock to common, stripping preferences and anti-dilution protection.

The provision aligns the syndicate: investors who want downside protections must keep supporting the company when it is hard. Pay-to-play terms appear mostly in recapitalizations and difficult markets, and are often introduced by the new money leading a rescue round.