What is Convertible Preferred Stock?

Convertible preferred stock is a type of stock that the owner has the option to convert into the common stock of the issuer. The number of shares received as a result of this conversion is stated in the preferred stock agreement. The conversion feature is a useful one for investors, since it allows them to receive a preferred stock dividend and also participate in any upward change in the price of the issuer’s common stock. Thus, an investor has the security of a regular return and a chance at a higher return.

Convertible preferred stock is an especially useful tool for a small startup business, because the conversion feature attracts investors who might otherwise not be interested in making an investment in the business.