Would Mark Suster recommend just biting the C-corp bullet, creating an ESOP, and issuing stock to early stage investors for a $350k AA-1 seed round raise or can convertible debt still offer an edge in this context?
I think it doesn’t matter for a $350k round.
Debt vs equity in 2018 for smaller rounds — who cares. We have bigger fish to fry.
Debt with a “cap” of $2m pre is probably a slightly worse deal for both founders and investors than a “priced” equity round at $2m pre for the reasons Mark highlighted. The investors get full antidilution protection (= worse deal for founders), and also, the investors have no idea what they are buying or exactly how much (= worse deal for investors).
But if you are hunting unicorns, it doesn’t matter too much for small pre-seed rounds anymore.
So my suggestion:
- Do whatever the investors want (debt vs. equity), if they are driving the discussion.
- Do whatever the founders want, if the round is way oversubscribed and the round is relatively small (<$1m total).
It’s when the round is large and you are still trying to do debt that’s where the real friction comes up these days.