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There is a clause Automatic Converstion in Series AA termsheet of Y-Combinator which says

Each share of Preferred will automatically convert into common stock, at the then applicable conversion rate, upon (i) the closing of a firmly underwritten public offering of common stock, or (ii) the consent of the holders of at least a majority of the then outstanding shares of Preferred.

What are meanings of the following in the above clause

  1. at the then applicable conversion rate - What decides the applicable conversion rate, any pointers to few cases may help?

  2. firmly underwritten public offering of common stock

  3. then outstanding shares of Preferred.

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1 Answer

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(1) Conversion Rate Under the barebones AA docs, the idea is that if there's a 2-for-1 stock split of the common shares, then you should get twice as many common shares on conversion. The rate is equal to the price originally paid divided by something called the "conversion price," which gets cut in half, or a third, or whatever, on a stock split. It's a defined term in the Certificate.

(2) A Firm Commitment Underwriting is when the underwriter (approximately) agrees to buy, and then attempt to resell, all the shares issued by the company in an IPO (or other public offering). "of common stock" means that the company is selling common, not preferred stock in the offering.

(3) Two types of stock: Common and Preferred. Investors typically get preferred stock. The idea here is that investors holding a majority of the Preferred Shares can force the preferred shares to convert to common. Why a majority and not unanimous? Because unanimous means that a single small investor might be able to hold up a deal.

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+1, thanks in relation to point (1) of you answer conversion rate is not equal to one only in case of stock split and never otherwise. – coding crow Aug 30 '12 at 19:02
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In the base agreement, the only things that can change it are "subdivisions or combinations" of common stock. But, search for "Conversion Price" in the document you're looking at to see all the references -- the fact that the doc on the Y combinator site says something doesn't mean that it wasn't changed by the time it got to you. – Chris Fulmer Aug 30 '12 at 20:45

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