Automatic Conversion Law and Legal Definition

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. A Qualified Financing is typically defined as an equity financing by the company, for the purpose of raising capital. The conversion is considered automatic because it does not require the vote of either the company or the investor. An automatic conversion can also occur regarding preferred stock of a company before the company’s IPO, with the automatic conversion clause converting preferred stock to common stock.