Term sheet clause 7 of 25 · Economics
Pay-to-play in a term sheet
In plain English: Investors who don't take part in future rounds lose some rights (e.g. converted to common). Typical: Uncommon at seed; appears in tough markets.
Founder-friendly
Present (protects against free-riders).
Investor-friendly
Absent.
What to watch for
Red flag
Usually helps founders, but can complicate rounds.
How to model it
Don't judge this clause by reading it; put numbers on it. In our workbooks it's modelled in Pro-Rata, so you can see what it changes in your ownership or your payout before you agree.
Not legal advice. Norms vary by country and market cycle. Have a startup lawyer review your term sheet before you sign.