Convertible Equity: The new startup-friendly seed-financing

3 years ago by in Finance + Raising Money, Grow

Image by Mark Wagner, Currency Collage Artist and the Founder Institute announced in conjunction with law firm Wilson Sonsini, Convertible Equity, a startup-friendly seed-financing vehicle intended to replace Convertible Debt notes. Over the past few years, Founders and investors alike have flocked to convertible debt, loaning billions of dollars per year to insolvent startups. The great irony is that nobody expects this debt to be repaid, and the debt comes with a lot of unwanted consequences.

The 3 benefits The and the Founder Institute founder Adeo Ressi share about the new Convertible Equity vehicle.

    1. Convertible Equity has all of the benefits of convertible debt. It’s fast. It’s cheap. It’s flexible on the amount raised. Convertible Equity can have a discount, a price cap, forced conversion events and all of the other popular terms of convertible debt. It actually has less terms, since you don’t have to think about repayment or an artificial interest rate mandated by the IRS.


    1. Investors in Convertible Equity will likely get a lower capital gains rate by having their investments treated as “qualified small business stock.” And, investors don’t worry about chasing down insolvent companies to repay their debts by “repossessing the furniture”. Instead, they can shoot for the big ideas where more favorable capital gains tax rates really matter.


  1. Companies that take Convertible Equity will not be burdened with debt on their books that they have to renegotiate every 12 to 18 months. They don’t have to worry about a lone disgruntled or struggling investor calling in a note and bankrupting the business. They can get a line of credit for equipment, or share their balance sheet with big partners without appearing insolvent.

The Convertible Securities Purchase Agreement (free) prepared by Wilson Sonsini Goodrich & Rosati.

Other useful articles: What is convertible equity (or a convertible security)?

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