(2010-08-31) Convertible Debt Startup Funding

On Aug27, Paul Graham tweeted 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. (Y-Combinator, Convertible Debt)

Seth Levine examined various aspects of this: 1) it’s not at all clear that this trend is as definitive as Graham suggests; 2) it’s a mixed bag for entrepreneurs (more positive in the short run, potentially negative in the long term); and 3) it’s clearly not a positive trend for early-stage investors.

Fred Wilson doesn't use debt do far.

Sept'2012: Mark Suster warns founders about doing this. Convertible debt with no cap is stupid for investors. Convertible debt WITH a cap is stupid for founders.

Dec'2013: Years ago, Y-Combinator helped popularize the convertible note as a way for startups that go through its accelerator to easily raise seed money. That gave companies the flexibility to get cash quickly without having to worry about hiring lawyers and pricing early funding rounds. Now the accelerator is moving to a new convertible equity model with an investment instrument that it’s calling “SAFE,” which stands for “simple agreement for future equity.”

• Quora thread

Sept'2014: Mark Suster hates them even more. But do you want to start a relationship with your most important supplier – that of capital to fuel your business – by avoiding talking about his or her expectations in terms of rights or privileges? What if when you have that conversation you don’t agree? It’s like punting on discussing with your future husband or wife what religion you’re going to raise the kids. If it’s important to you wouldn’t you discuss it up front?

• HackerNews thread