Convertible securities are instruments with embedded conversion features allowing holders to exchange them for equity—typically common stock—per contract terms.

How it works

Startup examples include convertible notes, SAFEs (equity-linked), convertible preferred with optional conversion, and warrants exercisable into common. Triggers vary: qualified financing, IPO, maturity, change of control, or holder election. Conversion price may reference caps, discounts, fixed ratios, or anti-dilution adjustments. Public markets also issue convertible bonds for mature companies—different regulatory context but same core mechanic. Cap table modeling must aggregate all convertibles to show fully diluted ownership post-conversion. Priority on liquidation differs by instrument type until conversion occurs.

Why it matters

• Founders: Each convertible layer adds negotiation complexity at priced rounds; clean structures speed closes.
• Investors: Terms determine participation in upside and protection in downside; instrument choice signals risk appetite.
• Finance/legal: ASC 815 and debt/equity classification affect reported liabilities—especially for notes with complex features.

Common mistake

Listing only outstanding shares on the cap table without a convertibles summary—priced round investors miss hidden dilution until diligence surfaces stacked instruments.

Related ideas

Convertible note, convertible debt, convertible equity, conversion rights, warrants, and fully diluted cap table cover the convertible securities landscape.