Seed rounds: Converts vs Equity
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September 2010 The reason startups have been using more convertible notes in angel rounds is that they make deals close faster. By making it easier for startups to give different prices to different investors, they help them break the sort of deadlock that happens when investors all wait to see who else is going to invest.
Paul Graham, founder of Y-Combinator , sent out a tweet on Friday saying: “Convertible notes have won. Every investment so far in this YC batch (and there have been a lot) has been done on a convertible note.” It’s an interesting data point on Y-Combinator companies, but is this truly a macro trend? Have convertible notes really won? And if so is that good for start-ups? Good for investors?
Seth Levine has a long and thoughtful post on convertible debt vs equity . If you are an entrepreneur or active in the angel/seed sector, you should read it. He wrote it in response to Paul Graham 's tweet that said: Convertible notes have won. Every investment so far in this YC batch (and there have been a lot) has been done on a convertible note.
There has been a debate going on the past few days over whether seed deals should be funded using equity or convertible notes (converts). Paul Graham kicked it off by noting that all the financings in the recent YC batch were converts. Prominent investors including Mark Suster and Seth Levine weighed in (I highly recommend reading their posts). While this debate might sound technical, at its core it is really about a difference in seed investing philosophy.
Using convertible notes vs priced equity in seed rounds is a hot topic right now. For background, see recent posts by Seth Levine , Chris Dixon , Fred Wilson , Paul Graham , Ben Yoskovitz , Bill Burnham , Mark Suster , William Carleton and Patrick McKenzie as well as older posts by Venture Hacks , Yokum Taku , Brad Feld , and Josh Kopelman . If I missed any good ones, please let me know and I'll add them to this list.
Seth Levine from Foundry Group touched off a debate on which is the best way to raise startup financing: convertible debt or equity. Paul Graham (intentionally or not) actually started things with a tweet , “Convertible notes have won. Every investment so far in this YC batch (and there have been a lot) has been done on a convertible note.” Fred Wilson joined the conversation, as did Mark Suster . All prominent and successful investors. And generally, they’re not fans of convertible debt.