[tonystubblebine]

I think people often structure the investment as a convertible loan specifically to avoid this question. The conversion part is that the loan converts to equity (with a discount) based on the valuation set during your series A. This way you don't have to come up with a make-believe valuation right now.

If you don't ever get to series A your company will either have to pay off the loan with interest or go out of business.

CRV offers this as part of their quickstart program and is very open about the terms. It's a good place to find out more.

http://www.crv.com/quickstart

"A standard interest bearing loan will be made to a corporation, which we will help you establish if you do not already have one in place. CRV will not seek a personal guarantee and will not hold you personally responsible for repaying the loan.

The loan converts into equity only if and when your company closes its next round of funding (typically a Series A round). If the company successfully raises its next round, in exchange for sharing the risk with the entrepreneur, CRV receives a discount on the conversion price when the loan is rolled into that next round. The discount will be a maximum of 25% (determined ratably at five percent per month, depending on how long it takes to close the financing, up to the maximum) off of the per share price. "