Downside protection
Seniority
Also called Preference stacking, Ranking
The order in which different classes of preferred shares are paid from exit proceeds — whether later rounds rank ahead of earlier ones, or all preferred ranks equally.
In plain English
When a company has raised several rounds, each with its own preference, something must decide the order of payment. Under a stacked structure the most recent round is paid in full first, then the one before it, and so on down to the earliest — which is paid last, and in a poor exit not at all. Under a pari passu structure all preferred shares rank equally and share the available proceeds in proportion to their preferences.
Stacking follows the logic of the market: the newest money is the scarcest and takes the best position. It also means that as a company raises more, the position of the earliest investors deteriorates without anyone renegotiating with them. A seed investor who agreed a 1× preference in year one may, by year six, sit behind three rounds totalling $80m.
Pari passu is better for early investors and is common at the earliest stages, when there is only one preferred class and the question has not yet arisen. It tends to give way to stacking as later, larger investors arrive with more negotiating power.
There is a further layer above all of this. Debt — venture debt, bank facilities, unpaid taxes and trade creditors — ranks ahead of every share class. A company with a substantial venture debt facility has creditors who are paid before the most senior preferred shareholder.
What it means for your cheque
Seniority is the term that quietly erodes an early position over time. Nothing you signed changes; the queue in front of you simply gets longer. It is the strongest structural reason why early investors care about how much the company raises subsequently, and not only at what valuation.
You cannot usually prevent stacking in later rounds — you will not be at that table. What you can do is know where you stand. Ask, at each round you hear about, whether the new preferred ranks ahead of yours, and keep a running total of the preference stack. It takes five minutes and it is the difference between understanding your position and guessing at it.
Do the arithmetic
A $70m exit under stacked and pari passu structures
The company has raised $10m Seed, $25m Series A and $50m Series B, all with 1× non-participating preferences. Total preference is $85m. It sells for $70m.
| Stacked — Series B paid first | $50m of $50m, paid in full |
|---|---|
| Stacked — Series A next | $20m of $25m, partially paid |
| Stacked — Seed | $0 |
| Stacked — ordinary shareholders | $0 |
| Pari passu — all preferred share proportionally | $70m ÷ $85m = about 82% of each preference |
| Pari passu — Seed receives | about $8.2m of its $10m |
| Pari passu — ordinary shareholders | $0 |
The same $70m exit paid seed investors nothing under stacking and $8.2m under pari passu. Ordinary shareholders received nothing either way — at this exit value the structure only decides which investors are made whole.
At the table
What to negotiate
- At entry, ask whether the documents contemplate future rounds ranking senior, or whether new preferred ranks pari passu by default.
- Track the total preference stack after every round and compare it with realistic exit values.
- Ask about venture debt. It sits ahead of every share class and is easy to overlook because it is not on the cap table.
- Where you have protective provisions, the right to consent to the creation of a senior class is one of the more valuable ones.
- Understand that a company raising a very large late round has materially changed your position even though nothing you signed changed.
Seniority: common questions
Can I stop later rounds from ranking ahead of mine?
Is pari passu common?
Where does debt sit relative to preferred shares?
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