Deal Terms
Forced Conversion
A provision that automatically converts preferred stock to common stock upon certain events, typically an IPO meeting minimum size and price thresholds.
Forced conversion (or mandatory conversion) is a provision that automatically converts all preferred shares into common shares when specified conditions are met. The most common trigger is an IPO that meets minimum thresholds for offering size and price per share. Some agreements also include time-based or valuation-based conversion triggers. Upon conversion, preferred shareholders lose their preferential rights (liquidation preference, anti-dilution, etc.).
In Practice
The preferred stock automatically converted to common upon the IPO because it met the forced conversion thresholds: minimum $50M offering size and a price per share at least 3x the Series C price. All Series A through C investors became common shareholders with the same rights as public market investors.
Why It Matters
Forced conversion ensures a clean capital structure at IPO, which is important for public market investors who don't want to navigate complex preferred stock waterfalls. The conversion thresholds protect preferred investors from being forced to convert in an unfavorable IPO.
VC Beast Take
The conversion thresholds are a negotiation point that deserves more attention than it typically gets. Investors want high thresholds (to protect against converting in a weak IPO), while companies want lower thresholds (to ensure conversion happens and the cap table simplifies). Getting this right avoids messy situations at the most critical moment.
Related Concepts
Further Reading
Exercise or Wait? A Guide to Startup Stock Option Decisions
Should you exercise your stock options now or wait? The answer depends on taxes, risk tolerance, and your company's trajectory. Here's a framework for making the right call.
How to Negotiate a Term Sheet as a First-Time Founder
Your first term sheet is exciting and terrifying. Know what's negotiable, what's standard, and the practical tactics for pushing back on liquidation preferences, board seats, and protective provisions.
How to Read a Term Sheet: A Practical Breakdown
Term sheets aren't designed to be readable. Here's a section-by-section guide to what matters, what's standard, and what should make you walk away.
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