Pari passu is a Latin phrase meaning "on equal footing" that describes a situation where two or more assets, securities, or creditors share equal rights and rank without preference or priority. In investment contexts, pari passu provisions ensure that different classes of investors receive proportional treatment in distributions, liquidation proceeds, or voting rights, with no single party having seniority over another.
The concept appears most frequently in debt agreements, venture capital deals, and bond issuances. When bonds are issued pari passu with existing debt, new bondholders have the same claim on assets as previous bondholders in the event of default or bankruptcy. Similarly, in venture capital term sheets, pari passu clauses ensure that investors in a particular funding round share identical rights—a Series B investor cannot claim preferential treatment over other Series B investors simply by investing earlier in that round or negotiating separately.
Why It Matters
Understanding pari passu rights protects investors from subordination risk—the danger of being pushed lower in the priority queue for payments or recoveries. When a startup raises multiple rounds of financing, later investors may try to negotiate senior rights that push earlier investors down the hierarchy. A well-drafted pari passu clause prevents this reshuffling and maintains equal standing among investors within the same class. For creditors, pari passu provisions mean that if a company faces bankruptcy, their claims will be satisfied proportionally alongside other creditors of the same rank, rather than being subordinated to others who might otherwise claim priority.
Example
A software company raises $5 million in Series A financing from three venture capital firms: Fund X invests $2 million, Fund Y invests $2 million, and Fund Z invests $1 million. The term sheet includes a pari passu clause for all Series A preferred shares. Two years later, the company is acquired for $15 million. After repaying debt and setting aside founder shares, $6 million is available for Series A distribution. Despite Fund X closing their investment two months before Fund Z, all three funds receive their proportional share based on ownership percentage alone: Fund X and Fund Y each receive $2.4 million (40% each), while Fund Z receives $1.2 million (20%)—perfectly equal treatment without preference for timing or negotiation leverage.