Conversion rights define when and how preferred stock converts to common, shifting economic and voting treatment.

How it works

Charters specify optional conversion—preferred holders convert at will at the initial conversion ratio, subject to anti-dilution adjustments. Automatic conversion triggers on qualified IPO above a price threshold, majority preferred vote, or sometimes specific sale events. Until conversion, investors may take liquidation preference proceeds; after conversion, they share as common based on share count. Ratios start 1:1 but anti-dilution provisions can increase common issuable upon conversion after down rounds. Some terms include full ratchet or weighted-average adjustments. Voting often allows preferred to vote on an as-converted basis for charter-level decisions even before conversion.

Why it matters

• Founders: At exit, investors convert if common share of proceeds beats preference—your remaining common value depends on that math.
• Investors: Conversion rights protect upside participation while preferences protect downside; IPO terms must satisfy automatic conversion thresholds or require waivers.
• Counsel: Drafting errors on conversion triggers block IPO roadshows—verify share counts post-conversion for S-1 disclosure.

Common mistake

Ignoring anti-dilution when modeling as-converted ownership. Down rounds increase preferred’s common share count on conversion, diluting founders more than headline ratio suggests.

Related ideas

Preferred stock, anti-dilution, automatic conversion, liquidation preference, and as-converted ownership tie directly to conversion rights.