Convertible Preferred Stock

Convertible Preferred Stock is a type of preferred equity that gives its holders the option to convert their preferred shares into a specified number of common shares.

Example

Let’s say that we invest $200 for 20 shares of preferred stock into a business called FlowerCentral with the below specifications:

1.5x liquidation preference (means you get 1.5x of your money back at a liquidation event)

8% annual dividends paid out at year end

$10 effective share price ($200 / 20)

Now lets say that FlowerCentral receives an offer to be acquired at $20 a share. Let’s see if we should convert.

Non-Conversion Situation = $200 × 1.5 (liq. pref.) = $300

Conversion Situation = 20 (shares) * $20 = $400

There’s a lot of different nuances here that we don’t cover because you simply don’t need to know them. But, it’s helpful to know how Convertible Preferred Stock works in general.