Stacked or Pari Passu: Who Gets Paid First in an Exit
By Series B most cap tables carry three sets of preferred shares, each with its own preference, and one line in the documents that decides the order they are paid in. Liquidation preference stacking is that line. In a strong exit it changes very little. In the mid-size outcome most companies actually reach, it decides which investors are made whole and which are not.
Which investors get paid first in an acquisition?
It depends on whether the preferred stack is senior or pari passu. Senior stacking pays the latest round first and works backwards; pari passu pays every series together, pro rata, when proceeds do not cover all of them. Common is paid last either way.
- Senior stacking: later rounds are repaid in full before earlier ones see anything.
- Pari passu: all series share available proceeds in proportion to their preferences.
- In a modest exit the difference decides whether seed investors recover anything at all.
A $40M exit, two ways
Suppose $10M of seed, $15M of Series A and $25M of Series B preferences against a $40M sale. Under senior stacking, Series B takes its $25M first, Series A takes $15M, and there is nothing for seed or common. Under a pari passu structure the $40M is shared across $50M of claims proportionally, so every series recovers about eighty cents on the dollar and common still receives nothing. Same exit, entirely different investor outcomes.
Common stock is last in both cases, which is why employees and founders should model the waterfall rather than the headline. The startup equity offer calculator shows what a grant is left with after proceeds are allocated, and the cap table glossary sets out how a waterfall is constructed tier by tier.
What to watch when the term sheet arrives
New investors ask for seniority as a matter of course, and existing ones rarely enjoy granting it. The compromise is usually pari passu across the preferred stack, sometimes with the newest round senior only up to its own invested amount. Either way, ask for the payout table at three exit values before agreeing. Lovie keeps every series' preference attached to its shares, so the waterfall is a query rather than a rebuild.
Standard drafting for these provisions is published in the NVCA's model financing documents.