What is Pari Passu?
Latin for 'on equal footing' - preferred share classes that share an exit payout in proportion, with no class paid ahead of another.
When multiple preferred classes are pari passu, their liquidation preferences sit at the same level of the waterfall: if there isn't enough to satisfy all of them, each class is paid the same fraction of what it's owed, pro rata. The alternative is a stacked (or 'senior/junior') structure, where later investors negotiate to be paid first and earlier classes only get paid once the senior class is whole. Why it matters to you: in a disappointing exit, seniority decides who actually gets money. As a founder you sit at the bottom of the stack regardless, but pari-passu preferences are simpler and friendlier to early investors and employees than a deeply stacked structure - watch the stacking creep in later rounds.
Example
- Series A and Series B are pari passu with $10M of combined preference. On a $6M exit, each receives 60% of its preference before common sees anything.