I'm still not buying unless a valuation is attached (his option four). Here is my reasoning:<p>Many startups are interested in using a convertible note for their early funding. I've heard three reasons:<p> 1. It's less paperwork than preferred stock<p> 2. VCs would rather do a Series-A than a Series-B (one solution is to name this first round "Series-Seed")<p> 3. It lets them avoid having to determine a valuation<p>
The first two reasons seem fine to me, assuming that they are true. The third reason is bad.<p>These convertible notes typically convert into preferred stock upon the next major financing (presumably the Series-A led by some VC), usually at some discount to what the VC pays (perhaps 20%). Sometimes there is a cap on this conversion price. If that cap would be a reasonable pre-money valuation today, then third reason doesn't really apply, since a valuation was in fact determined.<p>However, if there is no cap on the conversion price, or that cap is very high, then you are asking investors to give you money today, but not giving them the upside between now and then next major funding (which probably won't occur for another 6 - 12 months). During this 6-12 months you will build and hopefully launch a product and begin to prove it's market potential, or not. That's a lot of uncertainty.<p>Put another way, I'd rather wait 6-12 months to see what you build, how successful it is, and how well your team executes, and then decide whether or not to invest. And I'd gladly pay an extra 30%. However, if you need the money today, then it needs to be at today's valuation, not next year's.