Compare a preference with conversion into common equity

Fictional Acquisition Companion example

This hypothetical uses invented facts and numbers. An investor contributes $2 million to a fictional company. The simplified terms provide a 1.4× nonparticipating liquidation preference, senior to common shares, or an option to convert into 25% of the common equity. Assume no other senior claims, transaction costs or participation rights.

Compare two possible distributions

At $3.6 million of available sale proceeds:

• Preference amount: $2,000,000 × 1.4 = $2,800,000.
• Conversion amount: $3,600,000 × 25% = $900,000.
• Under these assumptions, the investor would choose the preference; $800,000 remains for common holders.

At $2.4 million of available proceeds:

• The preference is capped by proceeds actually available, so the investor receives $2,400,000.
• Common holders receive $0 in this simplified waterfall.
• Conversion would produce $2,400,000 × 25% = $600,000 for the investor, so it is less than the preference in this case.

These are deterministic calculations from fictional inputs. Actual rights depend on the governing documents, claim priority, costs and other securities.

Read the rights, not just the ownership percentage

Headline ownership and valuation do not by themselves show how proceeds are divided. Compare the preference, conversion choice and claim order across several outcomes, and distinguish proceeds available for distribution from enterprise value. Continue with preferred equity and equity value.