

"Convertible Equity" - A Better Alternative to Convertible Debt? - jonnycombust
http://techcrunch.com/2012/08/31/thefunded-founder-institute-and-wilson-sonsini-debut-startup-friendly-seed-financing-vehicle-convertible-equity/

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ChuckMcM
Interesting idea, not sure if I understand it though.

So you "loan" money in exchange for "equity" and you limit the potential
return on that money if the seed round is larger than a particular valuation.

It feels like a priced equity round that is held to just before the price gets
set by the lead investor.

Why would I do this rather than price it? Or perhaps more importantly at the
seed round stage how does this affect the LP's ownership calculation?

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sachinag
Yokum's blog post on the instrument is here:
[http://www.startupcompanylawyer.com/2012/08/31/what-is-
conve...](http://www.startupcompanylawyer.com/2012/08/31/what-is-convertible-
equity-or-a-convertible-security/)

I don't think that investors call debt at maturity in practice (in general - I
have heard of one Midwest-based investor that used default to pretty well
screw the company), but this reduces that risk.

Also, it appears sets the date for capital gains tax treatment to be earlier,
which is a win for the investors. (Although the "probably" qualifier in
TechCrunch and in Yokum's post scares me a little.)

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yokumtaku
Sachin - the point is that "convertible equity" can be characterized as
qualified small business stock, with potentially a lower capital gain tax
rate. It's not the start period on long term capital gains -- as LTCG would
start when convertible debt is issued anyway.

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stevievee
Calling it "convertible equity" is a farce... it should be called lazy equity.
This isn't a break-through in investment vehicles and no one should be drawn
in based on a check-list of convertible debt risks.

