Pari-passu

Pari-passu

Author: The Carta Team
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Read time:  2 minutes
Published date:  10 March 2023
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Updated date:  12 April 2024
Pari-passu is a type of investor preference where all preferred shareholders in a company have equal distribution rights during a liquidation event.

Pari-passu definition

Pari-passu is a Latin-derived term meaning “equal footing,” and is used in a wide range of legal agreements to refer to parties having equal rights. In the startup world, it refers to the preferences of preferred shareholders in a company. If investors have pari-passu preference (sometimes referred to as “blended preference”), that means they have equal rights to any available funds in a liquidity event, for example if the company is sold.

How liquidation preferences work

Most private companies issue two types of stock— common stock and preferred stock. Common stock is issued to company founders as well as employees, often in the form of stock options that can be exercised at a later date.

Preferred stock is issued to investors, such as venture capital investors. They are called preferred shares because holders receive preferences over common shares in certain key situations – for example, when money is to be distributed in an M&A (merger and acquisition) or other liquidity event.

Typically, preferred shareholders are paid out before common shareholders in these scenarios. In cases where the funds available for distribution are limited, that can result in preferred shareholders getting their money back, while common shareholders (including founders) receive nothing for their shares.

Investors can also negotiate liquidation preferences over and above the normal preferences. For example, later investors can receive “stacked preferences,” in which they receive preference over earlier investors in liquidity events.

By contrast, pari-passu preference means all preferred shareholders have equal rank, and available funds are distributed equally according to each investor’s percentage of the overall investment.

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The Carta Team
While we believe in assigning ownership at Carta, this blog post belongs to all of us.
DISCLOSURE: This communication is on behalf of eShares Inc., d/b/a Carta Inc. (“Carta”).  This communication is for informational purposes only, and contains general information only.  Carta is not, by means of this communication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services.  This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests.  Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor.  This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein.  ©2023 eShares Inc., d/b/a Carta Inc. (“Carta”). All rights reserved. Reproduction prohibited.