- Source link:https://feld.com/archives/2005/04/term-sheet-conversion.html
- TL;DR: Gives an overview of conversion, automatic conversion, and some advice regarding automatic conversion
- How helpful?: 4/5
- Topic Tags: conversion, term sheets, negotiations
- Relevant questions addressed:
- What is conversion?
- What is automatic conversion?
- Summary bullet points
Following is the standard language:
“Conversion: The holders of the Series A Preferred shall have the right to convert the Series A Preferred, at any time, into shares of Common Stock. The initial conversion rate shall be 1:1, subject to adjustment as provided below.”
- Allows investor to convert their preferred into common in the case of liquidation -> pro rata rate is better
- Sometimes, in extreme cases, used to control the vote on a common stock vote
- There is not necessarily a clause that allows you to re-convert back into preferred
- Automatic Conversion sets out specific conditions under which preferred stock will convert into common stock
- This is good because Investment Bankers will want all common stock when they IPO the company
- Don’t allow investors to negotiate different automatic conversion terms for different series of preferred stock
- Could end up in one series’ stockholders’ automatic conversion not triggering, effectively giving them a veto power over the IPO
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