A subseries of Preferred Stock created in connection with the conversion of a Convertible Security (SAFE or Convertible Note) into Preferred Stock in connection with a priced equity financing. A series of Preferred Stock with shadow series is often denoted by a number (such as Series A-2) to differentiate it from the Preferred Stock issued for new cash investments. The key difference between the Preferred Stock issued for new cash investments versus a shadow series issued upon conversion of a convertible security is that the liquidation preference and rate at which dividends are paid for the shadow series is adjusted to match the original dollar amount invested when the convertible security was purchased. This avoids an automatic premium payable to the holders of convertible securities in connection with a liquidation or payment of dividends.
Glossary