[motti_s]

I once dealt with a sophisticated investor, though with no experience in tech investments. The idea of a convertible note was foreign to him and thus unacceptable. He wanted to own preferred shares right away, but I wanted to avoid lengthy and costly negotiations and giving away control at that point.

We then discussed a middle ground between the two: the investor gets common stocks without any special rights except anti-dilution and an option to convert them to preferred at the time of the series A round. This way we could achieve many of the benefits of a convertible note, such as reduced legal costs and the ability to close faster. Eventually we didn't close that deal, but it seems that it could have been an interesting middle ground.

Has anyone ever done something like that? Is it common? I'm interested to know how it turned out and if you'd do it again.

[rdl]

No.

This is a horrible idea because it establishes a high price for the common stock. If the guy invests $100k into your common stock for 1%, you've just established that anyone getting a stock grant of 1% also owes taxes on $100k in income.

Reasonable lawyers familiar with startup financing wouldn't have advised this. Your investor probably isn't very sophisticated when it comes to equity compensation for employees, not just tech.