It doesn't convert at that valuation. It converts in a future equity round, usually the series A, valuations for which are on average over $10 million lately.
Thanks for the clarification. Thats what I thought. So convertible note is much better for the entrepreneur. It retains the optionality of doing well and consequently giving out less equity.
Notes aren't always better. It depends on the valuation cap at which they convert. A note with a low cap is just as dilutive as an equity investment at a low valuation. The YCVC note is uncapped, however, which means it's like getting part of your eventual equity round in advance.
IIUC a convertible note better for the investor in less-good outcomes because it's a note -- it's debt, not equity. In a bankruptcy equity holders are S.O.L. Creditors get to divvy up whatever is left. Which may not be much, but it's > 0 and they have a voice at the table.
I thought the convertible note is to be converted to equity in series A. If the company did well, it would presumably have a higher valuation, and they would have to give away far less than 25%.