Are convertible notes always the right solution?

No financial instrument is perfect. Many early-stage startups are very happy with the convertible note as a financing instrument. Not having the valuation discussion with your investors is a huge plus and speeds up the whole process. Especially when the convertible notes are issued in a speedy automated process such as Leapfunder allows you to do.

Are convertible notes always the right solution?

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Financial instruments for startups

Online there is lots of interesting discussion about financing methods for startups. To give you just a taste:

On TechCrunch seasoned lawyer Scott Edward Walker said about the convertible note:

One of the key advantages of issuing convertible notes is that the valuation issue is kicked down the road until the Series A round of financing – when there are a lot more data points and thus it’s much easier to value the startup (i.e., price the round). Accordingly, the issuance of convertible notes disposes of the foregoing three problems. Again, a convertible note is a loan (debt, not equity). A valuation of the startup is thus unnecessary; and, if there is no valuation, there are no problems of dilution, taxes and option pricing.

In our interview with Rutger Kemper, Dutch Angel Investor, said the following about investing via convertible notes:

I invest in straight equity of listed companies, but investing in equity stakes of startups is really something else. The main problem of equity investing in startups is valuation. It is extremely difficult to determine the price of a startup because in the early years they don’t generate profit, and the outlook is too unpredictable. The Leapfunder convertible note solves this problem perfectly. It is also a financial solution which, for me as an investor, is trustworthy and easy to understand. Another advantage of Leapfunder is that you can decide how much you want to invest, meaning that relatively small amounts can also be committed. This way, the investment possibilities are opened up to many investors.

However, on entrepreneur turned VC Mark Suster has a whole other vision:

I have never come across a sophisticated A, B or C round venture capitalist who thinks convertible notes are a smart move for entrepreneur or investor. The only people I have heard promoting them tend to be super early stage investors or accelerators and often when I talk to them about the structure they’ve never given much thought beyond “they’re easier,” “they’re cheaper” or “it’s faster to raise this way” none of which is actually true.

I suppose there is no ‘one size fits all’. There are many ways to raise funding. We encourage everyone to read about all the options, learn what are the possibilities, and make an informed decision on what fits your startup best.

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