[adw]

> $500k safe at a $10 million post-money valuation cap means the founder has sold 5% of the company.

This is a common oversimplification, but it's somewhat dangerous and I would be happier if people were more cautious in what they said here. It simply doesn't mean what you said; it means the founder has sold at least 5% of the company. If you're going to either raise 50m or shut the company and ditch your investors, then it's a wash; but if find yourself in a low-money scrappy situation, which realistically is where most non-YC companies are, it's very significant.

Convertibles and other structurally similar securities, in contrast to priced equity rounds, essentially have built-in down-round protection for investors. They have advantages, too, not least the speed in which deals can be done, but if you can do a priced round or a convertible round at similar speed and at similar cost, give serious consideration to taking the priced round.

[jasonkwon]

Everything you say is fair. On the point about "at least 5%," this is addressed in footnote #3 to the blog post. It's true that it's a simplification, but that's partly what makes the construct easier to work with.

I think the other thing to take into account is that if you're doing a comparison of safes, notes and priced rounds, it's not just a matter of seeing if speed and cost are equal, but what else you might have to give up in terms of rights. Priced rounds can come with downround protection too (often do), as well as board seats and investor vetoes on financings, sales of the company, etc. Convertible notes are debt so the investors will have a technical right to demand their money back after a set time (maturity).

[adw]

Yep. I'm essentially arguing that simplifying here is dangerous, no construct is easy to deal with, and I'd rather more care were taken (broadly across the entire industry, not singling out YC here) in representing that.

Also: these terms are completely reasonable and under normal circumstances if I were doing a startup – and this valuation made sense – they'd be terms I'd be happy to take. For the avoidance of doubt, all of this is about the marketing, not the substance; the substance is above reproach.

As you say, speed, costs, rights (board seats, information, pro-rata, drag-along/tag-along, you name it), pref structure, etc are all real things. I just prefer addressing those all up front.

[jasonkwon]

Cool. Appreciate the thoughtful feedback.

[neom]

Have you ever seen the legal fees of priced vs convertibles be the same? I certainly haven't.

[Kpourdeilami]

I think convertibles cost around $2k at max while priced rounds will start at $20-30k. The $20-30k is not too much money if you are raising over a million but for a $150k round, it is a little bit too much

[adw]

I had a priced round done (at startup rates, admittedly) by Orrick for a few thousand pounds Sterling – I forget the exact amount, but it was well under £5k – back in '09. They knew it was a loss-leader – lawyers want to build long-term relationships too.