Pari Passu Waterfalls: The Benefits of Building Your Own

Pari passu is a Latin term that means "equal footing." In the context of investing, the pari passu waterfall structure refers to the principle that all investors should be treated equally.

This includes both financial and voting rights.

What Is a Pari Passu Waterfall?

A Pari passu waterfall is an investing term that refers to the equal distribution of proceeds among investors. In other words, each investor receives their share of the profits based on their investment percentage.

This type of waterfall is often used in private equity and venture capital deals, where there is typically a limited number of real estate investors.

Distributing the proceeds equally among the investors ensures that each one receives a fair return on their investment.

Pari passu waterfalls can also be used in other types of investments, such as commercial real estate.

For example, if a group of investors purchase an investment property for $1 million and sell it for $2 million, they would each receive $200,000 based on their percentage of ownership.

This type of waterfall is a good way to ensure that all investors are treated equally and fairly. It also incentivizes investors to put forth their best effort to maximize their investment rate of return.

How Does a Pari Passu Waterfall Work?

If you're not familiar with the term, a pari passu waterfall is basically a way of dividing up profits (or losses) between investors in a project. The word pari passu means "equal footing" in Latin, so the idea is that everyone gets an equal share.

There are a few different ways to set up a pari passu waterfall, but the most common is to first pay back the initial investment, plus any interest that may be owed. After that, any remaining profit shares are divided up equally among the investors.

So, let's say you have a project that costs $1,000 to get off the ground. You have 10 investors who each contribute $100.

Once the project is complete, you sell it for $1,500. The first $1,000 goes back to the investors, plus any interest that may be owed.

In this case, let's say the interest rate is 5%. That means the investors would get $1,050 back ($1,000 plus 5% interest).

After that, the remaining $500 is divided up equally between the 10 investors. So each investor would get an additional $50 for a total return of $100 ($50 profit plus their initial investment of $100).

As you can see, the pari passu waterfall is a simple way to divide up profits (or losses) between investors in a project. It's a fair system that ensures everyone gets an equal share of the profits.

Common Mistakes With Pari Passu

There's nothing worse than getting into a business deal and realizing that you didn't have all the information you needed. That's why it's important to be aware of the potential mistakes you might make when it comes to the pari passu principle.

One common mistake is assuming that all classes of preferred stock are pari passu. While it's true that most classes of preferred stock are equal in ranking, there are some exceptions. Make sure you understand the details of your company's charter and shareholders agreement before assuming that your preferred stock is pari passu with all other classes of preferred stock.

Another mistake is assuming that pari passu applies to all circumstances. This is often not the case, so it's important to read the fine print and understand the details of your particular situation.

Finally, don't forget that the details matter when it comes to pari passu. Make sure you understand all the terms and conditions before entering into any business deal. Otherwise, you might find yourself at a disadvantage.

How to Create Your Own Pari Passu Waterfall

If you're looking to get started in the world of angel investing, one of the first things you'll need to do is put together a syndicate. A syndicate is a group of equity investors who pool their money together to make investments in startups.

When putting together a syndicate, one of the most important things to consider is how you will structure the deal flow. One popular way to structure syndicate deals is through a pari passu waterfall.

In this type of structure, the lead investor (usually the syndicate manager) gets first dibs on investing in a deal. If they pass on a deal, it then goes down the line to the other investors in the syndicate.

This type of structure ensures that everyone in the syndicate has a fair chance to invest in the best deals. If you're interested in putting together your own syndicate, there are a few things you need to do.

First, you'll need to find a group of like-minded investors who are interested in investing in startups. Once you've found a group of potential investors, you'll need to put together a deal flow.

This can be done by working with a startup accelerator or incubator or by sourcing deals yourself. Once you've put together a deal flow, you'll need to decide how you want to structure your syndicate.

One popular option is the pari passu waterfall. This type of structure ensures that everyone in the syndicate has a fair chance to invest in the best deals.

If you're interested in putting together your own syndicate, the pari passu waterfall is a great option to consider.

FAQs in Relation to Pari Passu Waterfall

How does pari-passu work?

In the context of a pari passu waterfall, it refers to the equal distribution of proceeds among all equity investors in a project.

What does pari-passu mean in shares?

Pari passu means "equal footing." In the context of a pari passu waterfall, it means that each layer of the waterfall receives distributions from the underlying asset in proportion to its ownership stake.

What is the difference between pari-passu and pro rata?

Pari passu means "equal footing," and pro rata means "in proportion". In a pari passu waterfall, each investor receives their share of return on investment in proportion to their investment.

Conclusion

Pari passu waterfalls are a great way to invest in startups. By following the principle of equal treatment for all real estate partnerships, they help ensure that everyone has a fair chance at success.

While there are some drawbacks to installing your own DIY pari passu waterfall, the benefits far outweigh them.

‍