When should a convertible note be treated as a replacement for an equity round, and take on characteristics of an equity financing?

David S. Rose
David S. Rose , Founder and CEO , GUST INC.
30 Mar 2014

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.

A large majority of serious investors will insist on an equity round, either lightly documented (such as a Series Seed) or fully documented (such as an NVCA Model Series A).

It’s probably safe to assume that six to twelve months is about as long as either you or the investor(s) would want to have a convertible note outstanding, so one significant factor in the decision is how much are you raising now compared to how much in total you will be able to raise this year. If it’s a small percentage, consider a note. If they are similar in range, go right for an equity round, instead of incurring the cost and hassle of double-papering a note and a preferred round.

*original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *

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This article is intended for informational purposes only, and doesn't constitute tax, accounting, or legal advice. Everyone's situation is different! For advice in light of your unique circumstances, consult a tax advisor, accountant, or lawyer.