Some of the types of preferred stock discussed in “Preferred Stock Demystified” – my previous series of blog posts on this topic – are convertible into shares of common stock.
For example, a holder of shares of convertible, non-participating preferred stock may elect to convert its shares into common stock if the amount payable for the common stock in an exit transaction exceeds the value of the senior liquidation preference. On the other hand, the company may be able to convert its preferred stock into common stock to allow for the occurrence of certain fundamental corporate transactions, like an initial public offering or a sale of the company.
The ratio for the conversion of shares of preferred stock into shares of common stock typically is a fixed ratio, which often is one (1) share to one (1) share at the time of issuance. Preferred stock frequently includes anti-dilution adjustments, which provide for changes in the conversion ratio if certain events or circumstances occur, such as dilutive stock issuances, stock splits and combinations. Such anti-dilution provisions typically ensure that the shares of preferred stock remain convertible into shares of common stock representing the same percentage of the company for the same aggregate conversion price.
This post was written by Matthew D’Ascenzo.