Pay to play clause in venture capital

Hushing - Nikolay Dubovsky

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The pay to play clause is commonly used in venture capital with the aim to encourage investors with economic and/or political privileges to participate again in future investment rounds of the startup where they have already invested.

With the entry of certain investors in the startup share capital, especially in case of venture capital firms (and also with business angels), multiple clauses are agreed with privileges in favor of the investor. In this respect, we can see the previous entry "Clauses commonly requested by venture capital investors".

Due to these privileges, the existing partners facing the new investor partner, can link the maintenance of these privileges to such new investor participating in future investment rounds. In this way, it is guaranteed in favour of the company (startup) that it will receive more funds in the future.

Mandatory participation to maintain privileges may be limited to a higher or lower percentage or amounts, depending on the parties negotiating and the startups needs. In addition, it may affect one or more of the privileges granted to the investor(s).

In short, the pay to play clause links the maintenance of the economic and/or political privileges of the investor to keep providing economic support to the company in the event of future investment rounds.