Automatic Conversion is a clause found in convertible promissory notes that dictates the automatic conversion of the convertible debt to the type of equity raised at a Qualified Financing*. The conversion is considered “automatic” because it does not require the vote of either the startup or the investor.
An automatic conversion can also occur regarding preferred stock of a startup before the startup’s IPO, with the automatic conversion clause converting preferred stock to common stock.
*A Qualified Financing is typically defined as an equity financing by the startup, for the purpose of raising capital, in which the aggregate of $1,000,000 (this amount can vary per deal) is purchased by investors.
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