“Pay to play” in venture term sheets should have the same deservedly bad reputation as it does in government contracting, where it is illegal. In this piece, I will present three arguments against pay to play.
By way of background, “pay to play” provisions in a term sheet are a mechanism to induce existing investors in a company to invest additional capital into the company. This is accomplished by punitive treatment of the existing investment should the investor want or need to sit out the current round. Typically, this treatment includes forced conversion of a preferred security into common stock, as well as some other common measures to change the rights and value of the prior investment.
To read the full, original article click on this link: Why Pay to Play is Bad for Venture | PourRichard's Symposium
