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Equity Securities
- Equity security is owned by an equity partner of an organization formed as LLC, C-Corp, S-Corp, etc.
- In public markets, many companies only have equity security as common stock on their balance sheet.
- Preferred Stock is an equity security with certain economic rights and preferences, or privileges, over common stock.
- Liquidation Preference is paid first to the preferred stockholders after debt holders and typically reflects the total sum capital contributed by the preferred stockholders.
- Conversion Rights, or the ability to convert their preferred stock share for a share of common stock, allows preferred stockholders to maintain their parity.
- Dividends afford the preferred shareholder a method to accrue value over time.
- Conversion Ratio is defined as the OIP / conversion price and can be negotiated by reducing the conversion price.
- Participation bridges the gap between liquidation preference and conversion rights with full participation being rare.
- A participation cap will be negotiated to allow for equal upper end of positive returns but still allows preferred stock to receive some extra benefit in the middle.
- Preferred stock would elect to convert to common, and the total distribution would be split pro rata between common and preferred, if the distribution out to common would result in a higher per value share of common stock than preferred.
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