Angels: Convertible Debt Is Seldom the Right Security for Startup Investments

Just after the Internet bubble burst in 2001, many of us angels were “crammed down” unmercifully by subsequent investors in our portfolio companies. These new investors were funding our companies at valuation far below the pricing we had agreed to earlier, resulting in substantial dilution to our ownership.

To avoid these “cram downs”, some angels began investing in startups using debt instruments that convert to equity at the same time and under the same terms as subsequent investors, with a small discount in pricing, based on the greater risk in our earlier investment. While there are some advantages to using convertible debt for early stage investments by angels, I dislike these instruments and seldom use them.

The advantages of convertible debt investments by angels in startup ventures are:

by: Bill Payne http://billpayne.com/

Full Story: http://www.theicehouse.co.nz/Internal/InternalBlogs/AngelsBlog/tabid/236/EntryId/48/Angels-Convertible-Debt-Is-Seldom-the-Right-Security-for-Startup-Investments.aspx