Pay-to-play

A pay-to-play provision is a contractual clause in a startup shareholders' agreement requiring existing investors to participate in a new financing round — typically a down round — to maintain their preferred share rights including liquidation preferences and anti-dilution protections. An investor refusing to participate (a non-payer) has their preferred shares automatically converted to ordinary shares, losing all preferences. It aligns investor interests with company continuity in distressed financing situations and protects founders against passive investors in cash-scarce periods.

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Example: during a down round of CHF 3.0 million (pre-money reduced 40%), the pay-to-play clause requires all Series A investors to participate pro rata. One investor declines: their preferred shares (value CHF 1.2 million) are automatically converted to ordinary shares — losing their 1x liquidation preference and anti-dilution mechanism. This conversion is the disciplinary mechanism that makes pay-to-play effective.

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Hectelion structures pay-to-play provisions in shareholders' agreements for fundraising transactions to protect founders in distress financing scenarios.