Explaining investment terms: Conversion rights

Where venture capital investors hold a preferred class of shares and it is permitted to convert these to ordinary shares, they generally require the right to convert them at any time, at an initial conversion ratio of 1:1. Conversion is normally delayed until exit so that investors are able to avoid losing the rights attached to the preferred class of shares.

This conversion ratio will be adjusted to take account of any reorganisation of a company's capital structure. In some jurisdictions, this conversion ratio can be adjusted to provide for a form of anti-dilution protection (see Anti-dilution (or price protection). If a dilutive event has occurred and this ratio has been increased, the investor may choose or may be compelled to convert its preferred shares into ordinary shares immediately prior to a liquidity event (such as a trade sale or an IPO).

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Howard Palmer

Howard is a partner in the corporate technology group.

Angus Miln

Angus is a partner in the corporate technology group.