Skip to main content

Definition of Shadow Preferred Stock

Shadow preferred stock is a series of preferred stock that's created when a SAFE or convertible note is converted into equity at the priced round that is a qualified financing. Shadow preferred stock is a real class of stock with the same rights and preferences as the corresponding preferred stock. Where it differs from the corresponding preferred stock is that it calculates per share liquidation preference, conversion price, and dividend rate based on the original investment amount in the SAFE or convertible note. It's meant to solve the problem of liquidation overhang from convertible notes by ensuring the convertible instruments don't create unreasonable liquidation preferences for their holders.