Comments on: Should I raise debt or equity?

By: Savraj

Savraj — Wed, 15 Apr 2009 00:55:27 +0000

It’s also important to note that it’s much cheaper from a legal fees standpoint to raise debt. Legal fees for small equity rounds (from what I understand) cost about $20k, which may be a significant bite into the amount you are raising.

By: JP

JP — Thu, 13 Dec 2007 22:31:14 +0000

Hello,

I’m a filmmaker, not a financial professional. I’ve put together a business plan and cash flow projections for a project involving a film that we have in production. To raise the money, I’ve been advised to offer 15% simple interest, with an ROI in two years. (The amount we want to raise is $1 million. We’ll complete the project budget with sponsorships.)

I am considering offering equity investment for seed money, valuing the company at $6 million, and selling 2940 shares at a discount of $300 per two shares.

Reading your articles, this structure seems glaringly naive. Will that put off investors? What financial scenario might attract investors to this investment?

Thanks!

By: Nivi

Nivi — Wed, 31 Oct 2007 18:27:51 +0000

See this article on cap tables: http://www.venturehacks.com/articles/cap-table

By: Anonymous

Anonymous — Wed, 31 Oct 2007 18:02:43 +0000

How is convertible debt treated on the Cap Table?

By: ds

ds — Fri, 04 May 2007 05:08:26 +0000

I like this structure for the reason that it preserves upside for the angels that are taking the first layer of risk. I have seen a fair number of deals where price-insensitive angels put some $ into a company on a fairly high valuation.

Later, in the first institutional round, the VC takes a clinical look at the business and puts a different (lower) valuation on it. In that case, no one is happy…the entrepreneur feels he has done a lot of work and is moving backwards, the angel feels like he has taken risk and gotten stuffed, and the VC feels (to the extent that they feel) like they are dealing with unsophisticated operators.

This is a neat structure to avoid this problem.

By: Should a startup company raise its seed round using a convertible note or Series A Preferred Stock? | Startup Company Lawyer

Thu, 03 May 2007 08:45:47 +0000

[...] on the convertible note. People good at excel should try to model the different scenarios. Venture Hacks has a good article about the math involved in this modeling [...]

By: Nivi

Nivi — Wed, 02 May 2007 09:55:03 +0000

Anonymous, Yokum addressed some of the subtleties of who eats the debt dilution in a great comment.

By: Anonymous

Anonymous — Wed, 02 May 2007 08:29:15 +0000

One other thing to note: Convertible notes can shake out differently than equity in the Series A, depending on how the definitives are written (is it taken out of premoney/postmoney, how the cap tables are formed, etc)

In our case, taking conv notes gained us founders an extra 2% or so over what a preferred round would have been, after the definitives/cap table shook out.

By: Nivi

Nivi — Tue, 01 May 2007 20:18:16 +0000

Dick, Yokum addressed some of the subtleties of who eats the debt dilution in a great comment.

By: Naval

Naval — Tue, 01 May 2007 19:57:36 +0000

Dick, The Series A might not want to give the angels a huge discount, but at the end of the day, they're largely indifferent since the extra dilution just hits the founders. Really, the situation you're pointing out occurs in one of two cases:

There is too small of a time gap between the two financing events. As the entrepreneur, you should be aware that no one likes to pay a higher price immediately after someone who got in at a low price. Thus the common use of "5% per month or every two months" for the discount formula.
You gave too much of a discount to the convertible. That's why you put a cap on the discount.

Worst case though, the founders can just eat the full dilution.