Start-Up Financing

Entrepreneurs are often torn as to which is the best financing mechanism for a start-up company, debt or equity.  Recently, start-ups have started favoring convertible notes for seed stage financing over equity.  Convertible debt is becoming the preferred financing instrument among entrepreneur for the following reasons:

(1)  Start-ups are very difficult to value. Convertible debt rounds allow both entrepreneurs and investors to defer the question of value until the next equity round.

(2) Convertible debt deals are less complicated than equity deals and hence, the transaction costs are less.

(3)  By deferring the often long and controversial question of valuation, convertible debt deals are far more simple, easier to negotiate, and faster to close than are equity deals. Accordingly, much needed capital resources are in the company’s treasury more quickly.

(4) The organizers retain control longer when the seed stage financing involved debt. Generally, the debt holder has minimal input with respect to management decisions.