Leverage the Pay-to-Play Provision to Align Early and Later Investors

Pay-to-play provisions might sound intimidating—rules that force early investors to participate in future rounds or forfeit their preferred protections. But in practice, these can be valuable tools for maintaining alignment and encouraging teamwork. When everyone knows up front that staying invested is required to keep special rights, it reduces conflict and headaches when tough times hit.

This approach can be particularly helpful in 'down rounds' or bridge financings. If one investor drops out, the pay-to-play converts their shares to common, reducing their liquidation preference (a soft penalty) but not forcing an outright recap. Some founders craft exceptions for truly small angels or friends—by proposing a threshold, they can keep the spirit of fairness without penalizing those who never intended to be long-term funders.

By modeling the impact of participation or non-participation on the future cap table and voting power, the company can anticipate power shifts in future, avoiding last-minute surprises. The principle draws from agency theory and cooperative game theory: aligning incentives and clarifying expectations at the start prevents later defection, strengthens trust, and provides stability when the going gets tough.

Initiate an open, early conversation with all investors about pay-to-play, defining the rules for continued participation and the real costs of opting out. Negotiate terms that are fair and non-punitive—like conversion to common, not total exclusion—and adjust the details if you have small, non-institutional backers who need protection. Aim to build a culture of shared skin-in-the-game, and print out your modeled cap table for everyone to see. This small investment in upfront clarity will pay dividends in crisis.