Georgia Articles Supplementary - classifying Preferred Stock as Cumulative Convertible Preferred Stock
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FAQ
Noncumulative describes a type of preferred stock that does not entitle investors to reap any missed dividends. By contrast, "cumulative" indicates a class of preferred stock that indeed entitles an investor to dividends that were missed.
Issuing convertible preferred stock is one of the many ways companies can raise capital to fund their operations and expansion. Companies will choose to sell convertible preferred stock because it enables them to avoid taking on debt while limiting the potential dilution of selling additional common stock.
CCPPO (Cumulative, Convertible, Participating, Preferred-dividend Ordinary) shares are a rare type of equity shares issued by a company, which contain multiple features, including cumulative dividends, participation, convertibility into common shares, and a preferred-dividend feature.
Convertible notes are usually faster and cheaper to negotiate and close than preferred equity, as they involve less legal documentation and due diligence. They also defer the valuation of the startup until the Series A round, which can be beneficial if the startup grows significantly in the meantime.
The four main types of preference shares are callable shares, convertible shares, cumulative shares, and participatory shares.
Cumulative preferred stock is a type of preferred stock with a provision that stipulates that if any dividend payments have been missed in the past, the dividends owed must be paid out to cumulative preferred shareholders first.
However, convertible preferred stock also has several drawbacks, such as dilution of ownership, lower dividend rates, higher costs, and risk of conversion.
Convertible preferred stock offers the investor the benefits of both preferred stock and common stock. Investors get the stability, liquidation priority, and higher dividends of preferred stock, but they also have the option to convert their shares into common stock later if they believe that the price will go up.