Finding investors is essential for many companies. A “pay to play provision” is such an instrument that might motivate investors to continue participating in fundraising. This is a relatively new provision that has gained popularity since the turn of the century. While the condition may appear harsh to some, many investors will agree to it, which may considerably aid a fledgling business.
Pay-to-play provision specifics
A pay-to-play provision requires an investor to continue paying (contributing to finance) in order to continue playing (avoid having preferred stock convert into common stock). This may be extremely useful since investors will agree from the start to support the firm throughout its existence. If they do, they will know right away.
Traditional loans, angel investors, crowdsourcing, and venture capital are all choices for funding new firms. While finding the proper investors for a venture capital campaign might be difficult at times, it can be extremely helpful for the right firms. You must be prepared to give up the associated stock in your firm in return for these investments.
Do you have to use pay-to-play provision in any case?
If you want to raise venture money, you should always consult with an experienced startup attorney who can walk you through the process. To begin, you must have a credible and convincing business plan to present to potential investors or organizations. Due diligence will almost definitely be performed by the investor, thus your business plan should always correctly and honestly reflect the health of the business.
When considering whether to add a pay-to-play option for potential investors, there is no definite answer because it actually relies on the conditions of the business seeking finance. The pay-to-play provision, like other alternative stock options, has both advantages and downsides. The truth is, organizations with obvious promises are significantly more likely to persuade an investor to accept this type of clause since it effectively locks them into further investment down the future. At the same time, organizations whose future is unclear frequently want this clause inserted to safeguard the company during downturns or times of financial difficulties.