So question: in a rolling close with convertible notes, what happens if the startup neither gets a buy out offer nor raises another round of capital?
YC companies get a lot of publicity. And so their chances of raising another round of capital or getting bought out are very good. This is not the case with most startups. So a rolling close with convertible notes may not be the best option from investor point of view - no?
(With an equity deal, the startup can get an exit until it goes out of business. With a convertible notes deal, you have a fixed timeframe and you (as an early stage investor) lose out if the exit happens beyond that time period...
...So I thought one never did a convertible notes deal unless they knew there was a very very good chance of an exit within the specified time frame... am I missing something?
My point is - I don't see rolling closes with convertible notes getting too popular with most angels.)
I think there is an assumption the VC agreement is structured without any sharing of operating profits, but I'm not sure why it has to be this way... anyone care to enlighten?
If a profit sharing component was added to this model, you could significantly reduce investor risk, possibly offer better terms to founders and create an added incentive for finding businesses that have a monetizable product or service. Maybe YC is trying to avoid founders that bow to these constraints in favor of startups focusing purely on the product? There is nothing wrong with this, but it might just be delaying the inevitable; someone, somewhere will need to make a profit from it or the business will surely die.
If the company reaches a point where it will need no outside capital (nor pursue acquisition/IPO), it could have a 'round' that simply converts the debt to equity at some agreed-upon value. Then, perhaps, the original investors can at least start the capital-gains clock, collect dividends, sell shares on a private market, etc.