Blog Archives
A year ago, in mid September 2014, I walked out of a Starbucks in San Francisco with the very first check from an angel investor for Glassbreakers. Though it was only $5,000, it was enough to prove to myself and my co-founder, Lauren Mosenthal, that we could actually fundraise for our startup. We already had 1,000 women signed
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For a sophisticated investor, there are none, because an uncapped note just doesn’t make sense (see my answer to “If a startup’s valuation is $x, how much larger should its cap on a convertible note be?”)
It doesn’t work that way. A convertible note and an equity round are two different things, done for different reasons. In most cases, the former is a quick way to get some money in the door in anticipation of the latter.
There is not a definitive answer to this, because a good lawyer can write terms into either one to make one or the other preferable to one or the other party.
That said, the primary entrepreneur-friendly reason for doing a Convertible Note (and the reason that no serious investor under regular circumstances will therefore do an uncapped note) is:
No, because they are, by definition, two completely different things.
“Series A” is a shorthand way of referring to what is typically the first institutional round of investment in a company, made in the form of purchasing Convertible Preferred Stock. A “Convertible Note” is a loan to the company, in which the principal (and often the interest earned to date)
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A couple of years ago, Paul Graham (Y Combinator) tweeted “Convertible notes have won. Every investment so far in this YC batch (and there have been a lot) has been done on a convertible note.”
The truth is convertible debt has not won. Many sophisticated angel investors and angel groups refuse to invest in convertible debt in seed/startup deals. Why?
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The question should be “used for what?”
Because convertible notes are designed to give investors an equity interest in a company that will eventually be worth much more than their investment, the intention on their part is always to convert into equity (after all, if they were just after the interest on a loan, they could find much less risky
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An impromptu Twitter debate arose among Fred Wilson, Dave McClure, Mark Suster, Chris Dixon and others about convertible debt, priced equity rounds, and the nuances of early stage financing. It was such a good discussion that Fred asked that someone Storify it. I’ve done that here and expanded it with some additional references, background info and light commentary.
http://storify.com/antonejohnson/convertible-debt-priced-equity-rounds-and-timing
Let’s start by understanding that because we are talking about something called “Convertible Debt”, it means that whatever it is will start out as one thing, and potentially convert (or “change”) into something else. In this case, what the investor receives in exchange for his or her cash starts out as debt, and potentially converts into equity.
Debt is a
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How to finance a new seed-stage startup? Equity? Convertible debt? Convertible equity?
As of August 2010, Paul Graham famously proclaimed, “Convertible notes have won. Every investment so far in this YC batch (and there have been a lot) has been done on a convertible note.” Yet in my little corner of Wonksville, Founder Institute CEO Adeo Ressi and Yoichiro “Yokum”
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