Legal Definitions - conversion value

Conversion value refers to the immediate market worth of a convertible security if it were exchanged for the underlying asset, typically common stock, at the current market price.

It represents the total value of the shares an investor would receive if they exercised their right to convert a bond, preferred stock, or other convertible instrument into common stock right now.

• Example 1: Convertible Bond

  Imagine a company has issued a convertible bond that allows the holder to exchange it for 30 shares of the company's common stock. If the common stock is currently trading on the market at $65 per share, the bond's conversion value would be calculated as 30 shares multiplied by $65 per share, totaling $1,950.

  This example illustrates that $1,950 is the immediate monetary worth of the common stock an investor would possess if they converted their bond at that moment.

• Example 2: Convertible Preferred Stock

  Consider an investor who owns 500 shares of convertible preferred stock. Each preferred share can be converted into 2.5 shares of the company's common stock. If the common stock is currently priced at $40 per share, the total conversion value of the investor's preferred stock holding would be 500 preferred shares * 2.5 common shares/preferred share * $40/common share, which equals $50,000.

  Here, $50,000 represents the total market value of the common stock the investor would hold if they converted all their preferred shares right away.

• Example 3: Convertible Note in a Startup

  An early-stage investor provided funding to a startup through a convertible note, which is a debt instrument that can convert into equity. The terms state that the note will convert into 1,500 shares of common stock upon the company's next qualified funding round. If, during that funding round, the company's common stock is valued at $10 per share, the conversion value of the investor's note would be 1,500 shares multiplied by $10 per share, totaling $15,000.

  This demonstrates that $15,000 is the current market value of the equity the investor would receive by converting their note at the valuation established in the new funding round.