Loan Of Bonds And Preferred Stocks Are Considered Primarily Creditors Of A Business

1671 Words Dec 10th, 2015 7 Pages
Q2: Owners of bonds and preferred stocks are considered primarily creditors of a business. However, in some instances they also have the capability of becoming corporate owners.
a.) Converting debt to stock equity
Convertible debt is a form of security, which in most cases issued to start-ups at the time of raising capital. The seed investor is given a promissory note that contains a conversion feature (Kimmel & Weygandt 2007). The conversion feature contains a mechanism in which the debt can be converted into equity at a later date. There are several instances when the debt issued to a company by an investor can be converted into equity. Some of them include;
Qualified financing- most of the promissory notes issued to a startup investor contain a clause of automatic conversion. The clause should dictate on how the debt can be automatically converted upon qualified financing (Gapenski, 1999). It can be typically defined as equity financing of a start-up with the sole aim of raising capital. The aggregate amount is one million dollars, and the amount can vary depending on the agreed upon deal. Once the amount has been reached the qualified financing becomes an automatic trigger upon which debt converts to equity. The conversion is said to be automatic because it does not require a vote from either the company or from the investor.
Conversion trigger occurs- the debt investor and the startup company are required to agree on a trigger when the debt should convert (Godfrey &…

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