Are investors passing on pari passu?

What might the prevalence of pari passu deal structures in startup fundraising indicate about market dynamics?

The percentage of transactions issuing shares pari passu peaked along with the venture market in 2021. However, in 2022, as deal volume dropped, the percentage of deals with more structure began increasing.

For background, pari passu deal structures bring new investors onto the cap table on “equal footing” (i.e. the same level of seniority) as other previous investors. In contrast, creating a seniority structure among the equity holders would preference (usually more recent) investors who purchased shares that are more senior in the capital structure (i.e. get made whole first in the event of a liquidation). In terms of sentiment, pari passu is generally considered to be a relatively neutral set of terms while other more structured terms, such as seniority ordered-by-equity-class (sometimes known as “standard” structure), tend to be thought of as investor‑friendly.

Above, we charted the frequency of pari passu in startup deal terms against ordered-by-equity class and bespoke structures (“non-pari passu”). According to data from Aumni-tracked venture deals, a notable shift started in 2021, with an uptick in the number of transactions completed non-pari passu. This trend is most apparent in late-stage deals, where the prevalence of pari passu has fallen by ~20 percentage points from the 2021 peak to today.

A closer examination, below, reveals that – perhaps unsurprisingly – the trend of more non-pari passu structure was largely driven by financings that were either flat or down rounds. While the percentage of up-round transactions that introduced seniority has remained relatively the same, both flat and down rounds saw meaningful shifts in deal structure throughout 2022, when nearly half of the transactions saw non-pari passu structure. Although trends normalized somewhat in 2023, the percentage of transactions with pari-passu structure was still below 2022 levels.

These deal term preferences, especially within late stage, imply an environment that continues to be investor-friendly, though with some easing in investor protection measures throughout 2023. Even still, the fluctuations in seniority structures indicate a market that is still finding its footing.

Aumni will continue monitoring these trends and other market conditions.

See more in the Aumni Venture Beacon Year End 2023 report. 

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^{Photo by Bernd Dittrich on Unsplash}

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