Term Sheet: Conversion by Brad Feld

  • 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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