What is Pari-Passu?
Pari-passu is a latin term that means 'at an equal rate or pace.' The term is often used in venture capital.
How Does Pari-Passu Work?
Let's assume Company XYZ is looking for $10 million of capital. It contacts three venture capital firms, all of which are interested. VC Fund A agrees to invest $5 million; VC Fund B invests $2 million; and VC Fund C invests $3 million.
To negotiate the deal (and to protect themselves), the venture capital funds give Company XYZ terms sheets to sign. The term sheets state the equity that VC Fund A gets in Company XYZ will be pari-passu to all other series of equity, meaning that it will have the same rights and privileges as the equity that Company XYZ will issue to VC Fund B or C.
For most companies, common shares are pari-passu, meaning that they all rank equally and no one set of common shares has a higher claim to a dividend or assets than any other common shares.
Why Does Pari-Passu Matter?
Pari-passu essentially means to treat all parties the same. Obviously, common shares and preferred shares are not equal; however, the shares within each class are usually pari-passu.