Pay-to-Play
I think the pay-to-play provision is described well enough in Wikipedia, that says,
Pay to Play is a provision in a corporation’s charter documents (usually inserted as part of a preferred stock financing) that requires stockholders to participate in subsequent stock offerings in order to benefit from certain antidilution protections. If the stockholder does not purchase his or her pro rata share in the subsequent offering, then the stockholder loses the benefit(s) of the antidilution provisions.
As we see, with the provision, the investor may have the right to plugged in the subsequant deal with the prescribed portion. It’s important especially in down round, for the investor who has the shares of Series A Preferred can get more preferred stock in lower price.
If the provision is exerted, the securities would be converted automatically to a series of preferred stock. On the other hand, when it fails they will be converted to a common stock resulting in the loss of all preferential rights – antidilution protection, liquidation preference, Board seat and so on.
