Pay-to-play bridge trap: how your stake shrinks

You have been asked to put more money into a company you already own, or lose rights you already bought. Bolt, the payment company that Ryan Breslow co-founded in 2014, is seeking up to $27 million in bridge financing after its valuation dropped from $11 billion in early 2022 to $300 million. The new money is being sourced from current investors and is set up as a convertible note that will become equity at a discount when Bolt completes a later funding round. The financing contains a pay-to-play clause that penalizes current backers by causing them to forfeit a substantial share of their Bolt equity if they do not invest. The company needs cash. Your question is what you lose if you do not add it.

New cash buys seniority; old cash gets demoted

Bolt's workforce has been reduced from 900 employees in 2021 to roughly 60 employees. The current raise follows a collapsed $450 million financing attempt at a $14 billion valuation, which existing investors including BlackRock and Hedosophia tried to stop through litigation. Ryan Breslow has pledged $5 million of his own capital to the Bolt bridge round. He expects at least $15 million of the bridge round to come from Bolt's approximately 100 existing investors, while acknowledging that not all of them will invest. The valuation gap shows how far the company has fallen, and the bridge is the next test for the old shareholders. The decision is direct: the bridge is here, and the old shareholders are being asked to pay for it or accept a weaker position.

The penalty is the real price

A pay-to-play provision is a financing condition under which current investors must add new capital in a later round to retain negotiated protections; if they sit out, they can lose anti-dilution protection, the right to avoid being diluted, preferred-stock rights, board seats, or information rights. In a convertible bridge financing, the most senior share class is usually the class with the highest dividend and liquidation priority, the order in which shareholders are paid, often preferred stock. On a whiteboard, draw two columns: new cash and old cash. The priority order is the line between them. If you are the old cash, the question is whether your shares keep their priority.

Carta data showed a rising share of funding rounds were bridge or extension rounds; emergency bridge financing can end in a down round, a later round at a lower valuation, that heavily dilutes founders. A full pro rata pay-to-play requirement, which matches your ownership percentage, can require an investor that owns 10% of a company to fund 10% of the new round. Imagine a startup whose Series A closed at a $40 million post-money valuation and whose later Series B was priced at a $25 million post-money valuation. With pay-to-play, a Series B term sheet can make a Series A investor's anti-dilution protection or preferred status depend on buying its required portion of the Series B, with conversion to common stock as a possible penalty. Investors who put in the new cash keep their preferred protections, while investors who do not participate can be diluted or lose priority. Read the term sheet for the penalty line, because it decides who keeps the preferred protections.

Get the penalty in writing before signing

Get these answers in writing before you sign. If the company will not show the math, the cost is hidden. These five items are the minimum. A term sheet that hides one of them is telling you something.

• Penalty trigger: What exact action or inaction causes the penalty? Is it failing to invest, failing to invest by a deadline, or failing to invest a minimum amount?
• Discount rate: What discount do participating investors get on the later conversion, and does the discount apply only to their new money or also to their old shares?
• Conversion price: What price will the note convert at, and how does that price compare with your original purchase price?
• Forced-investor list: Which investors are required to participate, and can the company add or remove names without consent?
• Before/after cap table: What is your ownership percentage if you invest, if you do not invest, and if the later round is smaller or larger than expected?

Ask for the cap table in each scenario, not just the company's preferred version. The numbers should show how much dilution can hit your stake, whether your preferred status survives, and whether your board or information rights remain. Use the discount and conversion price to calculate how many shares your note buys and how much your stake shrinks. With those answers in writing, you can decide whether to invest, negotiate, or walk away before signing.