

Ask Pg / YC: Common Stock or Convertible Debt? - newacc

As what I understand, YC and other clones ask for 6% (average) founder's stock for their initial high risk investments in the new startups.<p>So just wondering whether someone starting new should follow the same formula of offering founder's stock (with no control) to 3F (family, friends and fools) from whom they're borrowing money (&#60;$25k) or is it better to offer convertible debts? what are the pros and cons? OR is there any 3rd option?
======
joshu
Three choices: Preferred, Common, and debt.

Preferred stock is what investors typically get. It's got different rights
(which vary) and usually a preference, which means common stock is subordinate
at the payout time.

The nice part of preferred stock is that it's price can change independent of
the common stock, which has significant tax implications for option holders on
common stock.

Personally I don't like buying debt, as an angel. I won't do uncapped debt at
all. I want to get my ownership (and take the risk) at the time I put the
money down, not possibly a year or two later when someone else establishes the
value.

