The debt holder (your investor) makes the "decision". It's important to realize that the use of debt like this is a legal hack. It's not intended to be a real loan or repaid like one. This is one of the things YC fixed with Safe http://blog.ycombinator.com/announcing-the-safe-a-replacemen...
assuming that you can repay it. usually you've spent it and therefore you're doing that next priced round. I'm not sure who decides whether it gets repaid or converted.. I recommend you to read up a bit on that. However, if you're not going to convert it into equity it may not be interesting for a seed investor to invest. In that case you should just borrow money from a lender and don't bother with seed investors at all.
YC has recently introduced Safe, an alternative to convertible debt: http://techcrunch.com/2013/12/06/yc-safe/
It's convertible debt except it never gets repaid, always converts into equity at some point.
