Deal Terms
Convertible Preferred Stock
The standard equity instrument issued to VC investors — preferred stock that can be converted to common stock, typically at IPO or acquisition.
Convertible preferred stock is the most common equity security issued in VC financings. It gives investors preference over common stockholders in liquidation (via liquidation preferences) while retaining the upside of common stock through conversion rights. In a large exit, investors convert to common stock to participate proportionally — their liquidation preference is less valuable than their pro-rata share of a large distribution. In a small exit, they take the liquidation preference. At IPO, preferred stock automatically converts to common stock (mandatory conversion). Each financing round typically creates a new series of preferred stock (Series A Preferred, Series B Preferred) with its own rights, preferences, and terms that sit in order of seniority.