Convertible Debt is Bad For Angels

A couple of years ago, Paul Graham (Y Combinator) 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."

The truth is convertible debt has not won. Many sophisticated angel investors and angel groups refuse to invest in convertible debt in seed/startup deals. Why? Because convertible debt investment undervalues this very high risk capital. As Adam Fusfeld has pointed out, there are multiple issues involved in choosing between convertible debt and a shares deal, but I’d like to focus on one – the issue that seems to be most important to most angels – the impact of valuation on returns.

By Bill Payne

Full Story: http://gust.com/angel-investing/startup-blogs/2013/03/26/convertible-debt-is-bad-for-angels/