Convertible Debt vs. Equity: Which Is Right for Your Startup?

July 17 2011 4 Commented

In a recent post, Bill Clark, CEO of Microventures, did a nice job of summarizing the Convertible Debt versus Equity option for startup investors.  Unfortunately he left out the primary disadvantage to investors, which is why you won’t find most savvy angel investors who are part of angel groups using convertible debt.  Convertible debt can substantially reduce returns for angels, which is why I seldom consider convertible debt as an early stage investor.  For more details on this controversy, see the following posts:

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

When is Convertible Debt the Right Instrument for Angel Investments?

Frankly, I wish this controversy would go away and that all angels would simply use a standard preferred (light) term sheet to define their investment.  Here is an example of a Preferred Light Term Sheet developed by Dan Rosen, chair of the Alliance of Angels.

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