What would be Reasonable Convertible Debt Deals for Angels

March 6 2014 No Commented


I have written blogs on why I don’t invest in seed/startup stage deals using convertible debt instruments.  See:

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


When is Convertible Debt the Right Instrument for Angel Investments?

I was recently asked to quantify under what terms and conditions I might be willing to do a convertible debt deal.  Frankly, the answer is simple:

  1. When the round size is small and the company is super early (pre-seed stage?).  Say, the entrepreneurs needs $150K for robust customer validation (after a successful beta test).  The company may be a bit early for angels, but for some reason we like this one.  Convertible debt can be cheaper to close than a round of preferred stock, so perhaps there is no need to spend more than the minimum to close this funding round.
  2. The conversion valuation is fixed at a low price.  The median valuation for seed/startup stage deals in the US is currently about $2.5 million – see Halo Reports.  For a pre-seed deal with limited customer validation, a pre-money valuation of $1 to $1.5 million might be more appropriate.  So, let’s say the conversion price is $1 million.
  3. The time to conversion is no more than 12 months and at the option of the investor, although there might be some investor advantages to a longer time to conversion.


As you can read in the two blogs above, I am not interested in funding deals with convertible debt with conversion caps above $3 million or triggered solely at a discount to a subsequent round with no cap, because the pricing neither recognizes nor rewards the considerable risk involved in the first money into a deal.