When the dot-bust occurred, the going rule with VCs was to rein in their investments, getting cash where they could and deploying their liquidation preferences

When the dot-bust occurred, the going rule with VCs was to rein in their investments, getting cash where they could and deploying their liquidation preferences to cash out where possible. It was not panic so much as it was an exercise of common sense by the VCs at the time. A lot of startups had been riding on fluff and, when the fluff went away, it was time to cut investment losses. A crude, but key, indicator is that the liquidation preference in the relatively few fundings that did occur went from a former standard of 1x out to a new one of 3x to 5x. Few deals were done, and those that were done were on terms perceived by founders to be onerous. In such a climate, it likely would have been deemed reckless conduct by the VC's managing partners not to cash in on the convertible note and to opt instead for an alternative outcome that was highly speculative at best. We can't really know without being privy to inside details, which we are not. In any case, that decision shouldn't be second-guessed by outsiders today.