When Should Preferred Stock Be Converted into Common Stock
Many start-up corporations offer shares of stock in order to attract prospective employees and investors. Although there are several different types of stock out there, the two most common types include preferred stock and common stock. For more information about these types of stock, as well as the advantages and disadvantages of both, you should contact the experienced San Jose transactional attorneys at Structure Law Group today.
Preferred Stock
In most instances, companies issue a lot fewer shares of preferred stock than they do common shares of stock. Some of the typical characteristics of preferred stock include the following:
- There are typically no voting rights (as there are with common stock)
- Investors usually receive a guaranteed fixed income from preferred stock dividends.
- In the event the company undergoes bankruptcy proceedings, preferred stockholders are typically paid before common stockholders.
- At any time, a preferred stockholder may be required to sell the stock back to the company – typically at a price that is very favorable to the stockholder. This is referred to as stock redemption.
Preferred stocks, in essence, share some characteristics that are associated with stocks and other characteristics that are associated with bonds. Types of preferred stock include convertible preferred stock, straight or fixed-rate perpetual stock, and adjustable-rate preferred stock.
Common Stock
Common stock is stock where the owner may receive a dividend. However, these dividends are not guaranteed by any means. Moreover, the corporation issuing the stock is not required to pay its shareholders dividends under any circumstances. In the event the company decides to pay its shareholders dividends, it can cut off the dividend payments at any point in time.
In the event of insolvency or corporate bankruptcy, common stockholders essentially receive whatever remains after others take their share. Those “others” may include bondholders, creditors, and preferred stockholders.
Converting Preferred Stock into Common Stock
So when should you convert preferred stock into common stock? That all depends on your investment goals. Converting preferred stock into common stock usually occurs in the context of liquidation. Most preferred shareholders have a liquidity preference, which in turn allows them to receive a specified amount of money before common shareholders are eligible to receive anything. The purpose of a liquidity preference is to protect the investor and ensure that their stock successfully converts to common stock in the event of a merger or acquisition.
In some cases, a preferred stockholder may be able to both receive their liquidation preference and also share in a split of the proceeds with the company’s common stockholders.
Call Structure Law Group to Speak with a San Jose Business Lawyer Today
If you are interested in learning more about preferred stock, common stock, and the benefits of conversion under certain circumstances, you should contact the San Jose attorneys at Structure Law Group today. Our attorneys can review your stock options with you and help you make an informed decision about your investment strategy. To schedule a free consultation and case evaluation with a San Jose transactional attorney, please call us at 408-441-7500 or contact us online today.Preferred Stock