Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Pari-Passu

What it is:

Pari-passu is a latin term that means "at an equal rate or pace." The term is often used in venture capital.

How it works (Example):

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 it Matters:

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.