Conversion Ratio
The number of common shares each preferred share converts into, initially 1:1 but adjustable.
Definition
The conversion ratio determines how many common shares each preferred share converts into. It starts at 1:1 but can change if anti-dilution provisions are triggered. When a down round occurs, the conversion ratio for existing preferred shares increases (each preferred share converts into more than one common share), giving preferred holders more common stock and diluting existing common holders further.
Why it matters
An increased conversion ratio means preferred investors get more shares when they convert, directly diluting your common stock. In a severe down round with full ratchet protection, the conversion ratio can increase dramatically.
Example
Series A Preferred initially converts at 1:1 (1 preferred share = 1 common share). After a down round triggers weighted-average anti-dilution, the ratio adjusts to 1:1.3. Each of the 2M Series A preferred shares now converts into 2.6M common shares instead of 2M, creating 600K additional shares of dilution.