Should the Series B liquidation preference be senior to the Series A?
Takeaway: No, in a standard 'up round' financing, the Series B liquidation preference should be 'pari passu,' or equal to, the Series A; a 'stacked' senior preference is a non-standard, investor-favorable term seen only in down rounds or other difficult financings.
As your company raises its Series B financing, a key negotiation point will be how the new Series B Preferred Stock ranks relative to your existing Series A Preferred Stock. Specifically, you will need to determine the seniority of their liquidation preferences. This determines who gets their money back first in the event of a sale of the company.
There are two primary ways to structure this: pari passu or stacked. The choice between them is a powerful signal about the health of your company and the leverage of your new investors.
The Standard Model: Pari Passu Preference
What It Means: Pari passu is a Latin term meaning "on equal footing." When the liquidation preferences are pari passu, the Series A and Series B investors are treated as a single class. In an exit, they stand side-by-side in the line to get their money back and will share the liquidation preference proceeds pro-rata based on their respective investment amounts.
When It's Used: A pari passu structure is the overwhelming market standard for a healthy, competitive "up round" financing—a round where the company's valuation has increased since the Series A. It signals that all the investors, both old and new, are partners on an equal footing.
The Non-Standard Model: "Stacked" or Senior Preference
What It Means: In a stacked preference, the new Series B investors have seniority over the Series A investors. This means that in a sale, the Series B investors have the right to get all of their money back first, before the Series A investors receive a single dollar.
When It's Used: A stacked preference is a non-standard and aggressive term. It is almost exclusively seen in a "down round" or other distressed financing where the company is struggling and has very little negotiating leverage. In this scenario, the new investors are "saving" the company, and in exchange for taking on that significant risk, they demand a senior position in the capital structure to ensure they are the first ones to be repaid.
As a founder, you should usually resist a stacked preference in any standard financing. It is a punitive term that can damage your relationship with your existing Series A investors by subordinating their position. For most healthy, growing company, the liquidation preferences of all series of preferred stock should be pari passu.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.