Choosing the instrument
The instrument decides when the investor becomes a shareholder, at what price and with what priority. The choice depends on how close the IPO is, how confident both sides are about valuation and where the company is incorporated. A holding in ADGM or DIFC, which many Gulf issuers use, works under common law and accepts the usual international instruments; a company incorporated in a civil law country may face limits on preference shares or convertible debt.
Ordinary shares
The simplest option: the investor subscribes for ordinary shares at an agreed price. There is no conversion mechanism and nothing to unwind at the IPO. The downside for the investor is that ordinary shares carry no economic priority, so protection has to come from the shareholders' agreement. For the company this is the cleanest structure for the prospectus.
Preference shares
Preference shares give a liquidation preference, sometimes a fixed dividend, and usually convert into ordinary shares automatically at the IPO. They are common in rounds led by funds. The company has to make sure the conversion happens before admission to trading, because listing rules generally require a single class of listed shares and equal treatment of shareholders.
Convertible loans and notes
A convertible loan postpones the valuation question: the investor lends money now and converts into shares at the IPO price minus a discount, often with a valuation cap. If the IPO does not happen by a deadline, the loan is repaid with interest or converts at a fixed price. This instrument suits a round shortly before the IPO, when the price will soon be set by the market, but it adds debt to the balance sheet until conversion.
Exchangeable rights
Here the investor buys shares or a note at the level of an existing company, with the right to exchange them into shares of the future listed holding. This is used when the restructuring is not finished at the time of the round. The exchange ratio and the timing must be fixed carefully, since they will be described in the prospectus.
| Instrument | When used | Benefit for issuer | Watch out |
|---|---|---|---|
| Ordinary shares | Valuation agreed, structure ready | Simple, nothing to convert at IPO | Investor will ask for strong contractual rights |
| Preference shares | Fund-led round, longer horizon | Familiar to investors, converts automatically | Conversion must be completed before admission |
| Convertible loan or note | IPO close, price uncertain | Valuation set later by the market | Debt on balance sheet, repayment if no IPO |
| Exchangeable right | Holding restructuring in progress | Round can close before the new structure | Exchange ratio and tax effects need early work |
Investor rights tied to the IPO
- Valuation ratchet: if the IPO price is below an agreed level, the investor receives extra shares or a conversion adjustment so that its entry price is protected.
- IPO deadline: the company commits to list by a set date; missing it triggers other rights, such as a put or a change in conversion terms.
- Put option: the investor can require the company or the founders to buy back its shares at an agreed price or return if the IPO does not happen.
- Participation and allocation right: a right to buy shares in the IPO or a promised minimum allocation, subject to the exchange's allocation rules.
Ordinary shareholder protection
- Tag-along: if the founders sell control, the investor can sell on the same terms.
- Drag-along: a majority can force minorities to join a sale of the whole company; investors often negotiate a minimum price for it.
- Pre-emption rights on new issues and a right of first refusal on transfers.
- Reserved matters: decisions that require the investor's consent, such as new debt above a limit, related-party deals or a change of business.
- Information rights: monthly or quarterly management accounts, the budget, audit results and access to management.
What happens to the structure at the IPO
Before the prospectus is filed, the lawyers run a clean-up: preference shares and notes convert, the shareholders' agreement terminates or is replaced by a relationship agreement, board seats are reviewed against independence requirements, and the pre-IPO investors sign lock-up undertakings. Lock-up rules differ by venue. Saudi CMA rules lock substantial shareholders named in the prospectus for 6 months on the Main Market and 12 months on Nomu; Nasdaq Dubai Growth Market requires 12 months for pre-IPO shareholders; DFM and ADX rules have no mandatory lock-up, so it is set by the underwriting agreement.
A structure that cannot be unwound cleanly delays the IPO. That is why the round documents should be drafted with the target exchange already in mind. This article is part of the Eurasia Consulting Group educational guide for issuers.