Deal Terms
Conversion Rights
The right of preferred stockholders to convert their preferred shares into common stock, typically at a 1:1 ratio.
Conversion rights give preferred stockholders (VCs) the ability to convert their preferred shares into common stock at any time. This right is almost always exercised at IPO (when the company is required to convert all preferred to common) or in an acquisition where conversion produces a better outcome than the liquidation preference. Optional conversion allows investors to choose conversion when common stock value exceeds what they'd receive under their liquidation preference — for example, if a company sells for a very high price, investors may convert to participate proportionally rather than taking the fixed preference. Mandatory conversion happens automatically at IPO or when a supermajority of preferred stockholders vote to convert.