What is Convertible Security? A Comprehensive Legal Overview
Definition & Meaning
A convertible security is a type of financial instrument, such as a bond or preferred stock, that allows the holder to convert it into common stock of the issuing company. This conversion is typically at a predetermined price and can occur on specified dates. Convertible securities provide investors with the potential for capital appreciation through equity participation while also offering the fixed income characteristics of bonds.
Legal Use & context
Convertible securities are commonly used in corporate finance and investment contexts. They are relevant in areas such as securities law and corporate governance. Legal professionals may encounter convertible securities in transactions involving mergers, acquisitions, or initial public offerings (IPOs). Users can manage some aspects of convertible securities through legal forms and templates available from resources like US Legal Forms.
Real-world examples
Here are a couple of examples of abatement:
Example 1: A company issues convertible bonds that can be converted into common stock at a price of $50 per share. If the market price of the stock rises to $70, the bondholder may choose to convert their bonds into shares to capitalize on the higher value.
Example 2: A startup offers convertible preferred stock to investors, allowing them to convert their shares into common stock during the next funding round at a set price, which can be beneficial if the company's valuation increases significantly (hypothetical example).