A bunch of articles that talk about seed stage/pre-VC stage investments in startups. The debate is primarily between whether to do a convertible debt or to do a preferred equity. There are arguments both for and against each side.
The basic premise: convertible debt delays the conversation on valuation to the next round. It gives you the time to “set” the benchmark for your company’s valuation. Preferred equity is a simpler way of dealing with investments, if you are sure that your performances now gets you a fair valuation.
Brad Feld lays out the difference between convertible debt and preferred equity and points out that both routes have support. However, he does point out that if you do not intend to raise a big VC round next and hope to continue with small angel rounds, it is more sensible for you to do a preferred equity to be fair to your investors: http://www.feld.com/wp/archives/2006/02/whats-the-best-structure-for-a-pre-vc-investment.html
Josh Kopleman has a clear favourite in preferred equity because it aligns both the investor and entrepreneurs interest i.e. both with be interested in increasing the valuation of the company in the next round! However, he also says that a convertible note could be useful when you are already expecting a round of equity in a few weeks/months. He does give a few other reasons, read on… http://redeye.firstround.com/2006/04/bridge_loans_vs_1.html
Just in case you are suddenly confused about what Preferred stock is, here is a primer from the good old Investopedia to help you. Just go through the basics and come back for the remaining interesting stuff. http://www.investopedia.com/articles/stocks/06/preferredstock.asp#axzz1STNUO900
Seth Levine talks about the two options and clearly spells out the fact that though this seems to have a near term benefits for the startups he is not sure if it is sustainable in the long term. Great explanation of the context! http://www.sethlevine.com/wp/2010/08/has-convertible-debt-won-and-if-it-has-is-that-a-good-thing
Mark Suster clearly believes that convertible debt without cap is not here to stay for long. A nice write-up on how convertible debts came about and how the entrepreneurs should look at the option of convertible debt. http://www.bothsidesofthetable.com/2010/08/30/is-convertible-debt-preferable-to-equity/
Ok, the verdict is clear in the post title, Furqaan Nazeeri lists out reasons why he thinks convertible debt “sucks”. http://altgate.typepad.com/blog/2008/06/5-reasons-conve.html
Bill Payne explains the mechanics of convertible debt. The graphs are missing but worth a read. http://www.matr.net/article-29148.html
A list of articles by Bill Payne on convertible debt and preferred stock. Great stuff in one place. http://billpayne.com/category/convertible-debt