What is pay to play provision?

Definition A pay-to-play provision in a term sheet requires investors to participate, at the company’s request, in subsequent financing rounds on a pro rata basis. Early investors in biotechnology or life sciences companies need to be prepared to pony up cash in future financings and go the distance.

What is pay to play investment?

A “Pay to Play” provision is a requirement for an existing investor to participate in a subsequent investment round, especially a Down Round.

What is the impact of exercising the pay to play clause on all the parties involved?

A pay-to-play term insures that all the investors agree in advance to the “rules of engagement” concerning participating in future financings. The pay-to-play provision impacts the economics of the deal by reducing liquidation preferences for the non-participating investors.

What is pro rata right?

A pro rata right is a right that is given to an investor that allows them to maintain their initial level of ownership percentage during later financing rounds.

What is a down round?

A down round refers to a private company offering additional shares for sale at a lower price than had been sold for in the previous financing round. Simply put, more capital is needed and the company discovers that its valuation is lower than it was prior to the previous round of financing.

What is a pay or play offer?

In filmmaking, a guarantee, or informally a “pay-or-play” contract, is a term in a contract of an actor, director, or other participant that guarantees pay if the participant is released from the contract with various exceptions.

How does a liquidation preference work?

A liquidation preference is a clause in a contract that dictates the payout order in case of a corporate liquidation. Typically, the company’s investors or preferred stockholders get their money back first, ahead of other kinds of stockholders or debtholders, in the event that the company must be liquidated.

Are redemption rights common?

As a practical matter, redemption rights are not used all that often. That is because so-called “walking dead” companies usually don’t have money to buy back the investors’ shares. Some recent surveys have found these rights are included in less than one-third of VC financings (and even less on the west coast).

What do you mean by pro rata basis?

Pro rata is a Latin term used to describe a proportionate allocation. If something is given out to people on a pro rata basis, it means assigning an amount to one person according to their share of the whole.

What are the pay to play provisions in VC?

In their simplest form, such provisions require existing investors to invest on a pro rata basis in subsequent financing rounds or they will lose some or all of their preferential rights (such as anti-dilution protection, liquidation preferences or certain voting rights ). Video Player is loading. This is a modal window.

What is a pay to play provision in a financing?

Pay to play provisions tied to dilutive financings provide that only investors that participate in the dilutive financing are entitled to the benefit of the anti-dilution formula in effect. Investors that do not participate do not receive any anti-dilution protection.

What does pay to play mean in eve of financing?

(That’s called “eve of financing” pay to play). Pay-to-play provisions can, however, be drafted to apply to any future financing, regardless of whether it is a down round or not, to ensure the future support of all investors. What does a typical example look like?

What do you need to know about pay to play clauses?

The appropriate level of participation needs to be carefully considered. Pay to play clauses are often written to require each investor to participate in the dilutive financing to the extent of its percentage ownership of the company.

What is pay to play provision? Definition A pay-to-play provision in a term sheet requires investors to participate, at the company’s request, in subsequent financing rounds on a pro rata basis. Early investors in biotechnology or life sciences companies need to be prepared to pony up cash in future financings and go the distance. What…