Everything that can possibly be said about convertible notes vs. equity has already be said by much smarter and more experienced investors than me (see Wilson, Suster, Levine, and Dixon). I’m not going there. But I do think the entire context of this and many other VC vs. entrepreneur discussions needs to be completely reframed.
I am well aware that historically VCs have taken advantage of their opaque positioning, and thanks to increased transparency afforded by blogging, twitter, thefunded.com and the general web, we are seeing the death of that trend and practitioners of shitty deal terms. After years of shitty practices, I understand the need to rebalance by over-weighting the discussion towards ‘entrepreneur friendly’. But with the rise of VC2.0, we need to shift the meme around deal terms from ‘entrepreneur friendly’ to the more reflective and sustainable meme of ‘structurally healthy’ - i.e. deal structures that effectively and fairly promote the interests of both entrepreneurs and investors. Absent *fairness* for both sides, the ‘marriage’ stands little chance of success.
With respect to control provisions - this must be viewed through the lens of ‘structurally healthy’ deal terms. Why are control and protective provisions anti-entrepreneur? There are most definitely certain structures that are parasitic and imbalanced (multi-liquidation preferences, overly restrictive forced sale or no-sale provisions, etc.), but there are also plenty of provisions that are completely fair and reasonable for investors to request in return for their risk capital. Good entrepreneurs working with good investors know this and understand that all parties need to be fairly and reasonably compensated and protected. This works both ways.
And with respect to introducing these types of deal terms at the seed stage, we must consider the fact that there are different investment models at the earliest stages. Some angel/seed investors invest small amounts across a wide basket of early stage companies. They create positive network effects that benefit all companies within their broad portfolio. They generate returns by being in *every* good deal with the hopes that one or more will produce a grand slam and carry the fund.
Others, like our fund IA Ventures, take a much more ‘venture’ like approach to seed stage investing. While we invest more broadly than traditional later stage folks (our opportunistic strategy), the bulk of our capital is allocated in a heavily concentrated manner where we invest in relatively large chunks (for this stage) and aggressively allocate reserve capital for follow on support of our portfolio.
I am not advocating one approach to seed stage investing over another - in fact, both might produce highly attractive returns and only time will tell which strategies are most viable. But given our investment philosophy - one which necessarily involves heavy allocation of our capital, time and resources - we deem it completely and unapologetically appropriate to receive fair economic AND control rights. This is not entrepreneur unfriendly, this is structurally balanced.
Entrepreneurs who chose to work with us are well aware of what we bring to the table and, as a result, are comfortable and supportive of this balanced approach.