Angel investors increasingly making convertible loans rather than taking equity | Hacker News Reader

Angel investors increasingly making convertible loans rather than taking equity

ft.com

27 pointsdaviday8 comments

When 'pg' tweeted other day about all deals being convertible notes, I researched a bit about them. Following is my notes on em.

Convertible notes make a lot of sense for both Angels and Founders as both are taking risks. If a startup ever makes it big, founders have benefit as angels are being discounted. If a startup doesn't make it, at least angels get the power and they can act according to the prior agreed conditions. For angels, tax advantages are also worth considering. Again, all the benefits depend on the fine details.

Venturehacks has nice article. http://venturehacks.com/articles/debt-or-equity Summary is that, it is better to raise convertible debt for small amounts and it is better to go for the equity if bigger amounts are needed.

There is an awesome write up by Yokum here http://www.startupcompanylawyer.com/category/convertible-not...

There are many types http://en.wikipedia.org/wiki/Convertible_bond#Types

I think it is safe to assume that a seasoned angel/vc won't screw founders - it only gets them bad reputation. That said, it is everyone's responsibility to know/read what they are getting into before signing.

"Investors who put up the early “seed” capital for technology start-ups in the US have come up with a novel idea for how to value businesses that in most cases have not started trading: put the issue off until later"

I thought the move towards convertible notes was primarily being driven by the startups/founders rather than the investors.

it really depends.

in my experience, convertible notes are either for lamer startups (nobody wants to lead) or very hot ones (startup gets to demand terms) with equity in between.

as an investor, i would MUCH prefer a capped note or equity to a merely discounted note (i want the earliest pricing.)

as an entrepreneur, i would prefer the convertible, of course.

The standard rationale for doing a note is that they're simpler and therefore cheaper to do, which in theory helps both founders and investors (unless anyone thinks its a good idea to blow startup capital on lawyers).

This article was pretty much the most clueless thing I've ever seen written about convertible note financing. Better to just forget you ever saw it.

Maybe someone can help me out here, with something I don't understand.

What happens to the convertible note if you never go on to raise another round, but you still have a successful business that generates a lot of cash for yourself?

Depends on the terms - it could convert to equity, get paid back, or have it's maturity date extended...

More here: http://www.startupcompanylawyer.com/2007/04/29/what-happens-...

typically they convert to common or preferred after one or two years.

Are convertible notes new? Seemed common 10 years ago even.

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