Entrepreneurs: if you’re looking seriously at angel investment, and you have the kind of product-market fit and management experience investors will like, you need to take a good look at convertible notes.
Do yourself and the investors you want to talk to a favor: take a few minutes and do some homework on this issue.
I’d suggest you start with Fred Wilson’s Financing Options: Convertible Debt, one of his MBA Mondays series on his AVC blog. That’s a good summary. From there, maybe you want David Hornik’s Just Say No to Capped Convertible Notes. He’s talking about a specific subset of convertible notes, but still, worth reading through.
If you’re here on gust.com as an entrepreneur, I think you should know that many angel investor groups like convertible notes, mainly for one of the reasons Fred mentions: angel groups often look at relatively early stages, and the convertible note puts off the valuation for later, when – everybody involved. I don’t think most groups are locked in under all circumstances – for example, the one I’m a member of decided to jump straight to equity for one deal a couple of years ago, even though we generally assume our investment will be as convertible notes. The nature of that deal called for equity because it was a good candidate for a 3-5 year exit but not likely to get a quick VC investment to establish valuation.
Which leads me to another recommendation: all five of Anton Johnson’s “knowledge is power” five-part series on convertible note financing terms, on this blog. Here’s a link to the first, to get you started. You’ll find the others from there, and, by the way, his first post has an excellent list of other good sources.
All opinions expressed are those of the author, and do not necessarily represent those of Gust.