Automatic Conversion

Automatic Conversion refers to a term found in convertible promissory notes (same as convertible debt) whereby the note will automatically convert into equity upon the occurrence of certain events, i.e. a next round financing or maturity. Note that automatic conversion into the next qualified financing round is standard; automatic conversion at maturity is generally negotiated (but usually preferred from the company’s standpoint).

Example:

Our convertible notes call for the principal plus interest to automatically convert into the next round whereby the company raises at least $1M.

Liquidation Preferences and Convertible Notes

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