Allow investors to convert preferred stock into common stock if they prefer proportional payment over their liquidation preference. This conversion occurs based on a conversion ratio, initially set at 1:1 but subject to change, often through anti-dilution clauses.

Triggers when specific conditions, usually tied to an IPO with a per-share price exceeding a certain multiple of the stock’s purchase price, are met. Negotiating these conditions is crucial for founders, as multiple share classes can complicate an IPO. Additionally, ensuring identical automatic conversion terms for all classes of preferred stock is essential.