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Everything has its pros and cons, and he's pointing out that if you have a note with a high cap and then can't raise the next round above the cap, or if you hav
by not_that_noob 12y ago
Everything has its pros and cons, and he's pointing out that if you have a note with a high cap and then can't raise the next round above the cap, or if you have multiple notes outstanding, then it might mess with the mathematics of the cap table in a bad way when you raise a priced round.
The truth is that notes and YC's SAFE are still the way to go. Why? If the startup is taking off, then you're going to blow past your cap (which you should set fairly) and everyone's happy. If the startup isn't headed anywhere, well, why the hell are you raising more anyway? Consider selling or shutting it down. The problems he's pointing out apply in this case, and frankly you can always in such a situation consider re-negotiating prior deals if you have to. In other words, these are theoretical objections at best.
Most 'traditional' investors used to have it good in the (good, according to them) old days. They had the leverage, so they forced terms that were good for them. This meant lower valuations in general compared to today, and control in the form of board seats, which you generally had to have once you had different classes of equity. Those days are long gone, and this strikes me as a lament for the way things used to be.
- joshu 12y agoI've done about 90 angel investments. The average return for companies that start as a cap and not equity is < 1. Companies that have sufficient success at the time of raise do not generally do debt. YC biases them more towards notes, though.
- arbuge 12y agoHow many of those 90 were convertible notes, to put this in perspective?
- joshu 12y agoRoughly half.
- not_that_noob 12y agoAnd is your point then correlation == causation?
- joshu 12y agoThe stronger companies tend to do Series A over convertible notes. The trend toward notes is easier, but not better for startups. BTW: By "average" I mean that the sum of dollars invested versus the sum of dollars returned or marked to market.
- mbesto 12y ago> The stronger companies tend to do Series A over convertible notes. Would it be fair to say that the stronger companies also tend to have either (1) strong fundamentals (i.e. historic financial numbers to base a valuation on) or (2) rapid growth (i.e. the future is clear and the network effects are clearly on the horizon). My general assumption is that most angel deals are done "pre-curve" and equity deals are done during the curve. Every investors wants to be during the curve as it's the highest upswing in short term returns. The better argument here is probably - why are angels even entertaining debt deals then?
- nostrademons 12y agoIsn't that because stronger companies have more access to a Series A? I thought the point that's being made by other commenters on this article (grellas et al) is that convertible notes are frequently used for bridge financing to keep the company going when they don't yet have the product/traction milestones needed to justify a Series A. In this case, the alternative is going out of business. It's quite possible for the average convertible debt startup to be worse than the average Series A funded startup, and yet for taking that note to be a good move for any one single startup that happens to be in that position. The averages are bad because it allows more marginal startups to be funded; the specifics are good because it allows more marginal startups to be funded. I suppose one take-away for founders could be to beware the signaling risks of taking convertible debt if you are, in fact, good enough to raise a Series A. Another might be to do everything possible to get traction before running out of money. Both of those are fairly well-known already, however.