shadow preferred stock

Series Alignment

Convertible note conversions trigger creation of parallel equity sub-series inside startup cap tables. Issuing shadow preferred stock maintains precise alignment between actual dollars invested and statutory preference claims.

Liquidation Preference

Preference caps restrict payout distribution amounts during company acquisition events. When convertible debt converts at a discount into standard preferred shares, holders gain a preference multiplier that exceeds their cash contribution. Shadow preferred stock remedies this imbalance by fixing the liquidation preference per share to the lower actual conversion price paid by the note holder.

Consequently, original preferred shareholders and early note converters receive exact dollar-for-dollar liquidation protection without distorting distribution waterfalls. Board documentation must clearly designate these shadow series within amended articles of incorporation to avoid title confusion during liquidation.

Conversion Behavior

Automatic conversion provisions apply identically across standard and shadow share classes during qualified public offerings. Voting rights and anti-dilution protections remain uniform across all sub-series within the preferred class.