What it is:
How it works/Example:
Let's assume Company XYZ is looking for $10 million of capital. It contacts three firms, all of which are interested. VC A agrees to invest $5 million; VC B invests $2 million; and VC C invests $3 million.
To negotiate the deal (and to protect themselves), the terms sheets to sign. The term sheets state the that VC Fund A gets in Company XYZ be pari-passu to all other series of equity, meaning that it have the same rights and privileges as the equity that Company XYZ will to VC Fund B or C.
For most companies, common 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 it matters:
Pari-passu essentially means to treat all parties the same. Obviously, common preferred shares are not equal; however, the within each class are usually pari-passu.and