TLDR:
The conversion ratio specifies how many common shares a convertible security (bond, preferred stock, note) can be exchanged for, determining the equity stake the holder receives upon conversion.
Conversion Ratio Calculations
In convertible debt, the conversion ratio determines how many shares an investor receives per dollar of debt converted. If a $1M convertible note converts at a $5M cap at a $10M Series A valuation, the effective conversion price is $5M / (fully diluted shares at conversion), say $0.50/share, and the conversion ratio = 1M / 0.50 = 2M shares. Understanding this calculation is essential for founders modeling cap table impact before closing convertible debt financing.
For convertible bonds in public markets, the conversion ratio is fixed at issuance and typically set so that conversion is out of the money at the bond’s issue date — giving the company a lower coupon rate in exchange for giving bondholders upside participation if the stock price rises. Corporate finance teams model conversion scenarios as part of managing their capital structure, since mass conversion creates significant share dilution.