Regarding convertible notes: "“You’re putting in money now and getting a valuation later, whether the company is a failure or a success. If it’s a success, you get the valuation after it’s a success, but you really want the valuation of the company to be lower,” he says. “As an investor, that’s the wrong alignment with a start-up.”"
I didn't think sophisticated investors were doing convertible notes without valuation caps - something this article makes no mention of.
cdixon: "I believe that pretty much every other seed investor who advocates converts also assumes they have a cap. So any discussion of convertibles without caps seems to me a red herring." [1]
More importantly, angels behind a note want your valuation to be as low as possible (so they get the most value) - it's the misalignment that's most toxic.
I don't understand. My company recently raised using convertible notes with a cap right around where an appropriate valuation might have been. Now my investors are all interested in seeing the company valuation at the next funding round be a multiple on the cap. Where are the misaligned interests?
Additionally, it seems as though high caps are a separate argument from the "conv. with cap vs. priced round" argument. With either, the market decides what an appropriate valuation, cap, or terms (no cap) a company is able to raise at. Therefore, it is simply the mechanics of the market that lead to no cap notes and sky-high caps, not the fact that the deals are done with convertible notes.
Not trying to be argumentative; I'm really interested in learning why you've taken a strong stance on this.
I didn't think sophisticated investors were doing convertible notes without valuation caps - something this article makes no mention of.
cdixon: "I believe that pretty much every other seed investor who advocates converts also assumes they have a cap. So any discussion of convertibles without caps seems to me a red herring." [1]
Clarification please? (Josh?)
[1] http://cdixon.org/2010/08/31/converts-versus-equity-deals/
EDIT: Congrats on the recent funding and founding!