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Should I take an unsecured business loan as early seed capital?
The more I talk to angel and seed investors, it seems like a lot of them are offering to invest on a an unsecured note that converts to equity at the next priced round of funding. In my past experience, angels wanted to get equity when they invested in early stage companies. In theory, it seems like doing a convertible note structure seems to be to my advantage; am I missing anything? Should I just do a priced equity funding or is a convertible loan to my advantage? Why would angels do this type of funding?
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In normal circumstances as an angel investor I would like to maximize my upside so I would go for equity if I have confidence in the business model to compensate for the risk I am taking. But given the current market scenario I would first ensure that I would get interest along the way till the company does good enough till the point its market value appreciates. So this makes sense for the investor as she gets a fixed bond like interest till the second round of funding and thus minimizes her risk to and is able to participate in appreciation in the case of common equity.
I think in theory or in practice you are better off since it is not stamping any valuation on your company as of now. If you go bust, the convertible note investor has claims on your asset. If I am confident about my business model I would go for convertible and keep the sweat equity portion with me.
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