Deal StructureFinanceLegal
Pari Passu
Also known as: Equal ranking, equal priority, pro rata treatment
Latin for "on equal footing." In deal terms, it means two classes of debt share the same priority in the payment waterfall — neither gets paid before the other.
WHY IT MATTERS
Pari passu is the opposite of subordination. When seller notes are pari passu with senior debt, the bank and the founders share priority on repayment. Neither creditor can block the other. In practice, this means the buyer can't use a senior lender's covenants to freeze principal payments to the sellers while continuing to service the bank.
Most PE deals don't offer pari passu treatment on seller notes — the bank requires subordination as a condition of financing. But it's the benchmark founders should negotiate toward. Even partial parity (e.g., pari passu on interest with subordination only on principal) improves the seller's position.
The key question: does the founder's debt sit at the same level as the bank's, or behind it? Pari passu means same level. Subordinated means behind. The difference determines whether a covenant breach blocks your payments or just the bank's.