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VideoDebt vs. Equity Explained: Convertible Debt, Preferred Stock and Detachable Warrants | Podcast
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In this episode of Weaver: Beyond the Numbers, Robert Henry and Richard Steen explain the differences between debt and equity financing using three common financial instruments: convertible debt, convertible preferred stock and debt with detachable warrants. They discuss how each arrangement works, how conversion rights can affect ownership and the key distinctions between debt and equity.
Three questions answered in this episode:
- What is convertible debt?
- What is convertible preferred stock?
- How does debt with detachable warrants work?
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Detailed Description of Debt vs. Equity Explained: Convertible Debt, Preferred Stock and Detachable Warrants
00:00:00
Robert: Hello. Thanks for joining us. I’m Robert Henry, a partner in Weaver’s Corporate Tax Solutions Group. With me today is Rich Steen. Hey, Rich.
00:00:10
Rich: Hey, Robert.
00:00:11
Robert: Today, we are on Three Tax Questions, a series we’re doing where we’re going to answer and ask exactly three tax-related questions. Today, we’re talking about debt vs. equity.
00:00:21
Robert: We see a lot of companies with interesting balance sheet arrangements for financing and equity purposes. I’m going to ask about three of these today, Rich.
Can you tell me what is convertible debt?
00:00:34
Rich: Convertible debt is a note or a bond that the holder of that note has the right to convert into typically common stock in the corporation, and it’s something we see in private and public corporations.
00:00:48
Robert: It’s just like its name implies. It’s debt that you can trade in for equity.
00:00:54
Rich: That’s right.
00:00:55
Robert: Okay. Question two. What is convertible preferred stock?
00:01:00
Rich: In this situation, the holder would have preferred stock. They would have the right to convert into common stock in the corporation.
00:01:07
Robert: This is just one equity instrument exchangeable for another.
00:01:12
Rich: That’s right. Equity for equity. The difference between that and the debt is that it would be a liability typically on the balance sheet that is now converting into equity.
00:01:21
Robert: Okay. Question number three. We’re going to get a little bit more complex now. What is debt with detachable warrants?
00:01:28
Rich: The important thing here to keep in mind is that the warrants are detachable from the debt, so they can be traded or exercised separately from the debt.
00:01:36
Robert: In this case, I’ve got debt that I’m repaying, but you as a debt-holder have the option to detach a warrant and go buy a share of my common stock in addition to getting repaid for the debt.
00:01:47
Rich: That is right.
00:01:48
Robert: Excellent. Well, there’s Three Tax Questions, and thanks for joining us today.
00:01:52
Rich: Thanks, Robert.
