

A Simple Paragraph Every Entrepreneur Should Add to Their Convertible Notes - seehafer
http://www.bothsidesofthetable.com/2015/05/30/one-simple-paragraph-every-entrepreneur-should-add-to-their-convertible-notes/

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gumby
(just commented on his blog but since I found this on HJ):

Why have a cap at all? It doesn't help the company, and is often used as a
proxy for valuation, which it isn't (and is bad for the company). I don't
think it's that great for the note holder either, who gets the discount
regardless.

The use of a cap is quite a recent phenomenon (and I wrote a bunch of $500K
notes without caps just a few months ago) -- so let's get rid of them.

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rahimnathwani
The reason to use a convertible note is because the parties can't agree on a
valuation at which to issue equity. They _can_ agree that the angel should get
at least x% of the company, and from this they can calculate the valuation
cap.

A note issued without a cap limits the upside of the angel in exactly the
situations when his/her investment has helped the company increase its
valuation the most.

Anyway, this post isn't about that. It's about ensuring that liquidation
preferences are limited to 1x, which seems reasonable, especially if the note
has a coupon.

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gumby
> Anyway, this post isn't about that. It's about ensuring that liquidation
> preferences are limited to 1x, which seems reasonable, especially if the
> note has a coupon.

My point is that the cap is mathematically equivalent to a liq pref, but
worse, it's one that is applied _up front_ (before a liquidation event, so its
a conversion pref).

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rahimnathwani
"My point is that the cap is mathematically equivalent to a liq pref, but
worse, it's one that is applied up front (before a liquidation event, so its a
conversion pref)."

A conversion cap is not worse than a liquidation preference.

A conversion cap doesn't require the company to return cash to an investor. A
liquidation preference does. The latter impacts the ability of the company to
operate.

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nscheffey
One simple CSS rule this blog should add to its stylesheet:

    
    
      h1.title {
        padding: 20px;
      }

