Do Investors Prefer 12-Month Convertible Notes Over 24-Month Notes?

Q: Do Investors Prefer 12-Month Convertible Notes Over 24-Month Notes?

It depends on if the investment is material to the investor, and how big an “outcome” they are looking for.

The duration of the notes and really and other terms besides price really don’t much matter if (x) the amount invested is small, and (y) the goal is a big return or nothing.

If a large fund or large investor puts a small amount at a relatively low valuation — they typically won’t care much about the details. The term of the note, or the discount, or all that much at all except price.

It just usually isn’t material for a large fund. A $300,000,000 venture fund investing say $100,000 into a convertible note for say a 3% ownership stake … won’t move the needle. So they usually don’t sweat the small stuff.

Even a smaller fund, if their goal is “unicorn or bust” when investing … then again, the small terms aside from price won’t matter.

But … if the investors aren’t common tech investors, or they are investing a lot of their liquid assets … then the small stuff starts to matter. They worry more about making 2x-3x their money, vs. a typical angel investor hoping for 100x (with a high loss rate).

The more someone’s job is on the line, literally or figuratively, in an investment … the more they sweat the smaller deal points.

So a big fund with small dollars isn’t going to care about note maturity (12 months vs 24 months). I’m not sure personally I’ve ever even paid attention. But a small investor writing a relatively large check (for them), might care a lot. They might be really worry about losing the money, and getting paid back “on time”.

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Published on March 25, 2020

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