## Conversion of preferred stock into common stock

Dow Chemical will be converting each preferred share into 24.2010 common shares on the conversion date. The conversion reflects a price of \$41.32 per share. The company’s outstanding shares will As noted in the NVCA term sheet, there is a section called “Optional Conversion” which simply states that preferred stock may be converted into common stock at any time at the option of the stockholder and notes the initial 1:1 conversion ratio. Why would a stockholder convert his or her shares from preferred to common? Depending on the structure and economics of the deal, the stockholder may receive more cash upon liquidation if the shares are converted into common shares. Some preferred shares have a conversion price named when they are issued that allow the shareholder to convert them to the company's common stock at the set rate. In some cases, it is advantageous for preferred stockholders to convert their stock to common stock. Participating and non-participating preferred stock

The value of the shares you obtain by converting a preferred share is equal to the common stock's market price multiplied by the conversion ratio. The conversion premium percentage is the When investors convert their preferred shares to common shares, the company debits the preferred stock account and credits the common stock account. If the common stock price at the time of conversion is more than the par value of the preferred stock then the company debits retained earnings for the difference between the two prices. If investors paid a premium on the preferred stock at the time of purchase, the company must also make adjusting entries to the additional paid in capital accounts. Convertible preferred stock can be converted to common shares at the conversion ratio. The conversion ratio is set by the company before the preferred stock is issued. For example, one preferred That means your "cost" of converting to common is \$10 per share (\$500 preferred stock divided by 50 shares of common stock = \$10 cost per share in the event of conversion). If the common stock is less than \$10, your convertible preferred rights aren't worth much. The conversion ratio is the number of common stock shares you’ll receive for each share of convertible preferred you choose to convert. When you divide the conversion ratio into the par value, you get the conversion price -- the price the common stock must exceed to make conversion profitable.

## When to Convert Because some convertibles, such as preferred shares, may see their price rise and fall, investors need to keep track of the common stock price to determine when the conversion is worthwhile. By dividing the price of the convertible by the ratio of common stock shares, an investor can determine when a sale will turn a profit.

The conversion of preferred stock into common requires that any excess of the par value of the common shares issued over the carrying amount of the preferred being converted should be book value method. Preferred stock will typically convert to common stock with the consent of a majority of the preferred stock. In some financings, the threshold will be raised to 2/3 or higher in order ensure that there is sufficient consensus for conversion. Convertible preferred stock does this through its conversion feature, which allows shareholders to convert their preferred stock into a predetermined number of shares of common stock under certain Dow Chemical will be converting each preferred share into 24.2010 common shares on the conversion date. The conversion reflects a price of \$41.32 per share. The company's outstanding shares will The actual conversion of preferred to common is generally treated as a non-taxable recapitalization under Code Section 368(a)(1)(E).12 Under Sections 1.305-7(c) and 1.368-2(e) of the Regulations, however, a recapitalization can result in a deemed distribution for purposes of Section 305 if (i) it is part of a plan to periodically increase a shareholder’s proportionate interest in the corporation’s assets or earnings and profits or (ii) a shareholder owning preferred stock with dividends Dow Chemical will be converting each preferred share into 24.2010 common shares on the conversion date. The conversion reflects a price of \$41.32 per share. The company’s outstanding shares will

### Converting Preferred Stock to Common stock typically occurs in the case of a liquidity event (i.e. Acquisition or IPO). Since the conversion is typically forced in the case of an IPO, we'll focus on an acquisition scenario.

The conversion ratio is the number of common stock shares you’ll receive for each share of convertible preferred you choose to convert. When you divide the conversion ratio into the par value, you get the conversion price -- the price the common stock must exceed to make conversion profitable. The conversion ratio shows what price the common stock needs to be trading at for the shareholder of the preferred shares to make money on the conversion. This price, known as the conversion price, The conversion ratio equals the par value of the preferred stock, divided by the conversion price. It tells you how many shares of common stock an investor receives for every share of convertible preferred stock that is converted. The company sets the conversion ratio before it issues the convertible preferred stock. The lower the conversion premium, (that is, the closer the preferred shares are to being "in the money,") the more the price of the preferred shares will follow the price movements of the common stock. The higher the conversion premium, the less the convertible preferred shares follow the common stock. The company can set the terms of the conversion. It can allow preferred holders to obtain a fixed number of common shares for each convertible preferred share. A fixed conversion rate may include a cap on the number of shares you can convert at any one time. The potential problem with fixed-rate conversions is dilution of common stock. The conversion of preferred stock into common requires that any excess of the par value of the common shares issued over the carrying amount of the preferred being converted should be book value method. Preferred stock will typically convert to common stock with the consent of a majority of the preferred stock. In some financings, the threshold will be raised to 2/3 or higher in order ensure that there is sufficient consensus for conversion.

### The value of the shares you obtain by converting a preferred share is equal to the common stock's market price multiplied by the conversion ratio. The conversion premium percentage is the

The company can set the terms of the conversion. It can allow preferred holders to obtain a fixed number of common shares for each convertible preferred share. A fixed conversion rate may include a cap on the number of shares you can convert at any one time. The potential problem with fixed-rate conversions is dilution of common stock. The conversion of preferred stock into common requires that any excess of the par value of the common shares issued over the carrying amount of the preferred being converted should be book value method. Preferred stock will typically convert to common stock with the consent of a majority of the preferred stock. In some financings, the threshold will be raised to 2/3 or higher in order ensure that there is sufficient consensus for conversion. Convertible preferred stock does this through its conversion feature, which allows shareholders to convert their preferred stock into a predetermined number of shares of common stock under certain Dow Chemical will be converting each preferred share into 24.2010 common shares on the conversion date. The conversion reflects a price of \$41.32 per share. The company's outstanding shares will The actual conversion of preferred to common is generally treated as a non-taxable recapitalization under Code Section 368(a)(1)(E).12 Under Sections 1.305-7(c) and 1.368-2(e) of the Regulations, however, a recapitalization can result in a deemed distribution for purposes of Section 305 if (i) it is part of a plan to periodically increase a shareholder’s proportionate interest in the corporation’s assets or earnings and profits or (ii) a shareholder owning preferred stock with dividends

## Convertible preferred stock can be converted to common shares at the conversion ratio. The conversion ratio is set by the company before the preferred stock is issued. For example, one preferred

The value of the shares you obtain by converting a preferred share is equal to the common stock's market price multiplied by the conversion ratio. The conversion premium percentage is the When investors convert their preferred shares to common shares, the company debits the preferred stock account and credits the common stock account. If the common stock price at the time of conversion is more than the par value of the preferred stock then the company debits retained earnings for the difference between the two prices. If investors paid a premium on the preferred stock at the time of purchase, the company must also make adjusting entries to the additional paid in capital accounts. Convertible preferred stock can be converted to common shares at the conversion ratio. The conversion ratio is set by the company before the preferred stock is issued. For example, one preferred That means your "cost" of converting to common is \$10 per share (\$500 preferred stock divided by 50 shares of common stock = \$10 cost per share in the event of conversion). If the common stock is less than \$10, your convertible preferred rights aren't worth much.

The conversion ratio equals the par value of the preferred stock, divided by the conversion price. It tells you how many shares of common stock an investor receives for every share of convertible preferred stock that is converted. The company sets the conversion ratio before it issues the convertible preferred stock. The lower the conversion premium, (that is, the closer the preferred shares are to being "in the money,") the more the price of the preferred shares will follow the price movements of the common stock. The higher the conversion premium, the less the convertible preferred shares follow the common stock.