How can preferred stock become common stock?

We have a client who has common stock in XYZ and she claims those stocks "came" from the preferred stock they use to own? I am assuming that means the preferred stock was sold and then the common stock purchased, but is there another way this could have been done? She has little or no records on this.

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July 2016

Yes, she could have originally owned convertible preferred shares. When the investment was made, she was given preferred stock, but at some point either your client or XYZ caused the conversion from preferred to common. The conversion is generally not a taxable event, so the basis remains the same.

This is common in early stage investments. A young company raises equity, but the stock starts in the form of preferred in case the company doesn't survive. That way the preferred holders will have priority over any assets versus the founders.

July 2016
July 2016