Pay-to-Play provisions are company friendly terms sometimes included in term sheets, especially with a lead investor and some smaller investors. They require the original investors to keep investing in subsequent financings in the same proportion as they did in the first raise.

Under typical pay-to-play provisions, the Company's board will set aside a certain portion of the next financing to be purchased by the existing investors. The investors will probably have a seat on the board and will have to approve the next financing, which makes sure the set aside is reasonable. The board also has the ability to waive the pay-to-play option if there is enough interest in the subsequent financing to complete a round without investment from the old investors.

If the investors fail to buy their share of the new raise, their preferred stock is typically converted to common stock, losing liquidation preferences, anti-dilution rights, etc. The most company-friendly provisions convert all of the investor's stock to common unless they buy their entire share of the stock set aside. Investor's usually don't agree to this, and a typical compromise is a partial conversion, meaning that preferred is converted to common only to the extent that the investor doesn't buy into the next round.

Sometimes pay to play provisions will allow a majority (or some other percentage) of the investors to opt out of the pay to play on behalf of all of the investors. This means that if more than half of the investors decide they don't want to participate in the next round, none of the investors will have to. This makes sense from the investors' perspective because if the majority of investors don't want to invest in the next round, it's a pretty good sign that the company is not doing well. So, the investors don't want to be forced to keep throwing good money after bad. From the company's perspective, this term is not ideal. What kind of signal does it send to the market if the original investors, who believed in the company enough to take the biggest risk, don't want in a second transaction. Founders can try to get it removed, arguing that investors are part of the company and should stick with it just like the founders, but expect push back.

Another, less common term to watch out for is a pay-to-play that takes away specific rights of the preferred, rather than converting them to common. This is a potential legal fee black hole-it involves creating a series of "blank check preferred" stock that has separate rights from the original preferred offered to investors. Don't waste money on this if you can avoid it.