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Legal Definitions - conversion price
Definition of conversion price
The conversion price refers to the specific, pre-agreed price per share at which a particular type of investment, known as a convertible security, can be exchanged for a company's regular shares of stock (common stock). This price is established in the original contract or agreement when the convertible security is issued.
Example 1: Convertible Bonds for a Tech Startup
Imagine a growing technology startup, "Innovate Solutions Inc.," issues convertible bonds to raise capital. The agreement for these bonds states that each $1,000 bond can be converted into 50 shares of Innovate Solutions' common stock. In this scenario, the conversion price is $20 per share ($1,000 bond value / 50 shares). This means bondholders have the option to exchange their bonds for common stock at a rate equivalent to $20 per share, as specified in the bond's terms.
Example 2: Convertible Preferred Stock in a Retail Chain
A large retail chain, "Urban Sprout Markets," issues convertible preferred stock to a group of institutional investors. The terms of this preferred stock state that each share, originally purchased for $100, can be converted into 4 shares of Urban Sprout's common stock. Here, the conversion price is $25 per share ($100 preferred share value / 4 common shares). The investors can choose to convert their preferred shares into common stock at this predetermined rate, as outlined in their investment agreement.
Example 3: Venture Capital Investment with a Conversion Option
A venture capital firm, "Future Growth Ventures," invests $3 million in a promising biotech company, "BioGen Innovations," through a convertible note. The agreement specifies that if BioGen Innovations achieves certain milestones or goes public, Future Growth Ventures can convert its investment into common stock at a fixed price of $15 per share. This $15 per share is the conversion price, representing the rate at which the venture capital firm's initial investment can be transformed into ownership shares in BioGen Innovations.
Simple Definition
The conversion price is the contractually set price per share used when converting a convertible security, like a bond or preferred stock, into shares of common stock. This price determines how many common shares an investor receives for each convertible security they exchange.