Another significant benefit to not having actual debt is what happens if the company has been operating at a loss at the time the debt is converted. The IRS tr

Another significant benefit to not having actual debt is what happens if the company has been operating at a loss at the time the debt is converted. The IRS treats debt that is converted as "debt relief" which is equivalent to income, which is taxable. In the case of my company, when we raised our Series A, I converted from a single-member LLC to a C-corp, and wound up getting a tax bill for around $50,000(!) for the "debt relief", which was ultimately paid out of the proceeds of the money we raised, which in turn came out of the company's pocket. So, in the end, we wound up paying a "convertible debt tax" to the government. I'm actually surprised this comment hasn't come up yet; I would have thought the convertible debt tax would be somewhat common.