Legally cheap and easy, convertible debt has been the primary vehicle to finance early-stage startups for years, but it unnecessarily saddles these startups with debt. Last week the Founder Institute, TheFunded.com, and WSGR introduced convertible equity as an alternative to convertible debt.
The news was covered across several prominent business channels.
According to J.J Callao, of Forbes, "Ressi argues that convertible equity is 'convertible debt without the debt. Everything works more or less the same as in a convertible debt deal – investors get a discount for purchased shares that’s realized upon conversion at a capped (or uncapped) valuation – with the more onerous provisions left out. Investors don’t get the ‘gun’, as Ressi calls it, and companies don’t artificially carry debt on their books, a potential liability when seeking a line of credit from a supplier or closing a deal with a large corporation.”
According to Dan Primack, Editor of Fortune, convertible debt has mistakenly been used in one of the most prevalent startup hubs in the world: “One of the secrets of Silicon Valley is that a large number of start-ups raise their first round of funding in the form of debt, rather than as equity.”
Christina Farr, of VentureBeat, says it “remains to be seen whether venture capitalists, critical of convertible rounds, will adopt this new model.”
You can read the full stories as well as TechCrunch’s piece here:
- Forbes - http://www.forbes.com/sites/jjcolao/2012/08/31/adeo-ressi-introduces-convertible-equity-convertible-debt-without-debt/
- Fortune - http://finance.fortune.cnn.com/2012/08/31/killing-convertible-debt/
- VentureBeat - http://venturebeat.com/2012/08/31/convertible-equity/
- TechCrunch - http://techcrunch.com/2012/08/31/thefunded-founder-institute-and-wilson-sonsini-debut-startup-friendly-seed-financing-vehicle-convertible-equity/
