seems to think convertible debts are a bad option. Would someone explain why both he and pg are potentially right in their own ways? (don't know if that's the case, but usually ends up being)
from my experience, that's dumb advice. equity financing being simpler than debt? please. worried about multiple investors with different warrant coverage? try having entirely different classes of preferred shareholders on for size.
it sounds like this post is more of a warning against convertible debt with warrants, which, while at times very beneficial to the entrepreneur, can be more complicated to understand. but debt can and should be dead-simple, should be a 3-10 page document, and can be prepared for less than $5k in legal fees.
equity, on the other hand, is generally a 30-100 page document, has many, many more negotiation points than debt, and, due to the extreme complexity, can easily cost anywhere from $15k-$70k in legal fees.
further, a well negotiated debt agreement can be very beneficial to the founders, while being relatively fair to the investors: the founders get to benefit from a Series A upside down the road. even if you don't have the leverage to pull off a conversion of debt based on a discount of the series A price, a capped conversion isn't such a bad thing, either, given that it's so much simpler to pull off than equity.
PG is probably referring to a capped convertible note.
On a capped convertible point 5 is completely negated.
Point 4 is not relevant. Since preferred comes first any way.
Point 3 is a reason to do convertible note.
Point 2 is a good point. But you really don't want to be negotiating terms on Series A (which are complex) with an angel that does not deal with them every day. If the angel is willing to just accept what you give them then maybe that is a valid point against doing a convertible.
Point 1. At least at the time of raising the convertible note it costs about 10th of the lawyer cost as a series A. Maybe the lawyer cost is higher when converting it, but presumably you care less about lawyer costs at that stage.
Convertible debt is a bad deal for the investor. Put your money up now but you don't get equity till later, after the cash and time have allowed for valuation growth?
Capped is better but I'm still less excited. You still have to negotiate terms and whatnot (what if there's an early acquisition, do I just get paid back? Or do I get converted? At what price? etc.)
So, six months worth of rent is only $9600. I'd be hesitant to give up any amount of equity for such a small sum. YC gives small sums...but not that small, and, of course, YC gives a lot more than money.
Very clever marketing though, and seems like a pretty cool guy with an interesting background. But, I'll point out that it's not hard to find cool people with tech backgrounds to rent housing from here in the valley, if you opt to rent from individuals rather than big apartment mega-complexes. I ended up in a house owned by an early PayPal employee who now helps setup tech conferences; he's been very useful and pleasant to talk to.
Then again, there probably is something to be said for doing this in a made-to-flip company. Spend as little as possible, build as fast as possible, design your life around avoiding hassle during that period, make something great, make as many connections as you can, and get out rich. This would be pretty useful in such a case. A couple points in a company that you hope to sell for high hundreds of thousands or low millions wouldn't be a bad trade at all.
I'm in a similar boat. I have a founder / angel landlord. He recently wrote me a letter saying that he raised rent on everyone but me b/c he likes what I'm doing and know's it's tough out there.
Equity is for life. It's a bum deal to trade equity in your company for a small amount of cash, unless whoever you're selling to is a real value-add investor or advisor who can contribute more than money for the LIFE of your company, not 6 months of petty cash.
ditto...I have met Freeman, he is a good guy, and he's been through the startup grind and is entrepreneur-friendly.
The area around his apartment is walking distance to a great complex with a ton of pan-asian restaurants... pho, korean, huge chinese grocery store, malaysian, chinese.
