"Pay-to-Play" Provisions Making A Return In Venture Financing

In recent months, we have begun to see venture financing rounds that include the negotiation of "pay-to-play" provisions. These provisions have been largely absent in recent years due to the buoyant financing environment. However, at times when companies face greater challenges in raising funds under their current capital structure, these powerful recapitalization tools may be deployed to encourage reinvestment and new investment into a company. "Pay-to-play" provisions can help deliver the necessary funds, but it is important that companies evaluate and implement them in a manner that anticipates and mitigates the associated risks.

WHAT ARE "PAY-TO-PLAY" PROVISIONS?

In financing rounds that include some element of recapitalization, a company will seek to attract new financing by modifying the economic rights of prior investment rounds, including the priorities, liquidation preferences or valuations of one or more classes or series of preferred shares.