"Convertible Equity" - A Better Alternative to Convertible Debt?

"Convertible Equity" - A Better Alternative to Convertible Debt?(techcrunch.com)

22 points by jonnycombust 13 years ago | 4 comments

ChuckMcM 13 years ago |

Interesting idea, not sure if I understand it though.

So you "loan" money in exchange for "equity" and you limit the potential return on that money if the seed round is larger than a particular valuation.

It feels like a priced equity round that is held to just before the price gets set by the lead investor.

Why would I do this rather than price it? Or perhaps more importantly at the seed round stage how does this affect the LP's ownership calculation?

sachinag 13 years ago |

Yokum's blog post on the instrument is here: http://www.startupcompanylawyer.com/2012/08/31/what-is-conve...

I don't think that investors call debt at maturity in practice (in general - I have heard of one Midwest-based investor that used default to pretty well screw the company), but this reduces that risk.

Also, it appears sets the date for capital gains tax treatment to be earlier, which is a win for the investors. (Although the "probably" qualifier in TechCrunch and in Yokum's post scares me a little.)

yokumtaku 13 years ago | |

Sachin - the point is that "convertible equity" can be characterized as qualified small business stock, with potentially a lower capital gain tax rate. It's not the start period on long term capital gains -- as LTCG would start when convertible debt is issued anyway.

stevievee 13 years ago |

Calling it "convertible equity" is a farce... it should be called lazy equity. This isn't a break-through in investment vehicles and no one should be drawn in based on a check-list of convertible debt risks.