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.