Equity versus Convertible Notes: What's the difference between 1M at a 10M cap (note) versus 1M at a 10M priced round?

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JASON LEMKIN

You’ll hear a lot of technical answers here.  Debt is “cheaper and faster” because there are fewer legal fees and less documentation, etc. (maybe, not always).  Debt is “more expensive” because there is implicit anti-dilution protection baked into notes and SAFEs.  Yeah, yeah.

Let me step up one level higher.

Usually — usually — with a note you’ll maintain more control as founders, at least, for now.  Because no one is buying any stock.  So they aren’t getting any rights at all, except what are in the notes themselves.  And those rights in the notes can often be amended fairly easily.

And with a note, there’s far, far less certainty what the investors are buying.  $1m of WhatWhenHow?  You just don’t know.  You really have no idea what you are buying.

So as a VC, if the amounts are small, it doesn’t matter.  But, as the check size grows … this creates anxiety.

So …

I’ve decided, for me at least, as a VC:

  • I’ll invest in convertible notes and SAFEs if the amount is <$800k or so, and
  • There’s someone on the board — just 1 person — to represent the investors.
  • Because I need to know what I am buying if the check size is material … and no matter what, that there is some check-and-balance here if I’m investing institutional money.

As an angel, though, I don’t and didn’t care.  For $25k, I just invest in the best possible founders … Face East … and wait. 🙂

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Published on November 8, 2015
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