Meaning
A legal clause ensuring that multiple creditors or share classes receive equal treatment during payment distributions prevents any single claimant from securing an unfair advantage. When securities are issued pari passu, they share the same priority level in the liquidation order. This arrangement prevents one class of investors from receiving their payouts before another class is compensated.
Equal Treatment
Holders of these equal ranking securities receive payments simultaneously and in proportion to their claims. This structure is common in multi stage venture financing where later investors agree to share the same liquidation rank as earlier backers. It reduces friction during negotiations by establishing a clear baseline of equality.
Payment Order
In the event of a sale or liquidation where funds are insufficient to pay everyone in full, the available capital is distributed proportionally. For example, if two investors hold equal ranking shares and the proceeds are too low, both receive the same percentage of their initial investment. This reduces the risk of early backers being completely wiped out by later funding rounds.
Recovery Ratio
The application of this rule is strictly limited to the specific class of securities defined in the investment agreements. It does not apply to senior debt or statutory claims like taxes.
