WAIT – Now Troy Likes Convertible Notes?

0:00 So I clearly made a big mistake. In all of my ranting about the problems of convertible debt and SAFE notes, I left many people with the impression that they are never appropriate. And that couldn't be further from the truth. There definitely are times when convertible debt or SAFE is an appropriate vehicle for an early stage startup. I just want to make sure you're using them right and understand the ramifications when you do. So let me give you a couple examples. So notes were really invented as a new one.

0:30 easy vehicle for bridging a company imagine a company that has been gotten

0:34 some investment it's getting some traction and it just needs a little

0:37 longer than it has cash for until it gets to its next round a note is a great

0:42 way to do that I as the investor will give you the entrepreneur some money

0:47 it's gonna last you three four or five months to get that last little bit of

0:51 traction so you can close your equity round as a benefit to me for taking that

0:55 early risk you're gonna give me a 20% discount on that next round makes

0:59 perfect sense typically it's a small percentage of that upcoming round and it lasts for a small

1:04 period of time perfect example of when to use a note another example is very early in the stage

1:11 of a company when you're getting those first dollars in you see notes are different than equity

1:17 in that you can typically have what's called a rolling close i can have a note with one person

1:21 and then a note with another person a note with another person they don't have to happen at exactly

1:26 the same time. When you close an equity round, it's like a home closing. Everybody comes together,

1:30 lots of signing and paperwork, all the wires happen at the same time. So if you're raising a

1:36 small amount of money, 50, 100, 200, even up to $500,000, a convertible note or safe is probably

1:43 the easiest way to do it. You can get the money as it comes in, convince one person to join up for

1:48 50K, collect another 75 the next week, 100 the next week, right?

1:53 And the legal expenses are significantly less than doing a full equity round.

1:59 It's also great because one of the things that accelerators tend to do is offer a note as part of the package.

2:05 So Techstars, for the last 10 years or so, has been offering a 100K note to each of the companies that comes into Techstars.

2:12 And sure, it's easy to get that 100K in, low on the paperwork, easy.

2:16 But more importantly, those companies then can turn around to other investors and say,

2:21 hey, do you want the same deal Techstars got?

2:23 And allow them to load up and get a little more capital, allowing them to quit their day job,

2:28 focus on this startup full time, and get enough traction they can go raise their next real round.

2:34 So I just want to make sure that you guys are thinking about this properly.

2:39 And people always want guidelines.

2:42 They want to know what are the limits.

2:44 So I sort of alluded to it.

2:45 Anything under $500,000, I expect is a note.

2:48 Anything over a million for an early-stage startup, I expect is equity.

2:52 There's some gray area in between those two, and it depends.

2:55 But that doesn't mean notes are inappropriate to be over a million dollars.

3:00 For example, a company we invested in just did a bridge note for $5 million.

3:05 That sounds crazy according to my metrics,

3:07 but this is a company that's bridging from their B round to their C round.

3:11 They expect that C round to be a $25 million round.

3:14 Raising five million to give them another three to six months of traction, it's less

3:19 than the rule of two that I explained in an earlier video, it makes perfect sense.

3:25 So yes, notes and safes are okay.

3:28 If used judiciously and used at the right time, they can be your friend.