Today we talked about pay-to-play provisions in VC term sheets. These provisions require investors to invest in subsequent financing rounds or risk having their current preferred stock convert to common stock or lose some other preferential rights (e.g. anti-dilution, liquidation preference, or voting rights). In effect, pay to play provisions encourage investors to reinvest even when the conditions of a business don't look encouraging to avoid having their previous investment being significantly diluted.
It's interesting that these provisions seem to go in and out of fashion.
While pay-to-play limits investors' choices, it also provides some assurance that investors won't be incentivized to play a game of chicken when the company needs someone to foot the bill for a bridge round. Whether or not these terms are executed, they can signal how committed investors are to a company and its mission.