Convertible Note or Direct Equity?

This is a question both angel investors and founders grapple with at the early stages of a company.

Let's assume that there are 16 seats on a rocket taking off for Mars - How much would you be willing to pay per seat?

Your answer would probably depend on when the rocket is taking off?

Some of us are adrenaline junkies and we will pay no matter what to have a seat on the maiden flight - We don't give a shit about the risk.

It's our life and we don't care if we die in the process - the thrill is in the chase.

Then come those folks for whom the thrill is in the kill - they would like to get on the rocket and make sure they get to Mars - they don't want to die.

Then come the big boys - who will replace their private planes with rockets for junkets to their bunker in New Zealand for a weekend break or a temp lockdown.

Or use to go scouting for rare minerals on the Moon so that their big corp can become bigger - At this stage, it means rocket tech is now safe enough for risk averse billionaires who want to attain immortality.

Then come the 1% of humanity like us who will fill economy, business or first class on American Rockets or United Rockets or Rocket India :)

Yep - if you are reading this, we will be very late to the big game buddy.

And that's probably why you are looking at putting in $50k or $100k USD in tech startups - and hoping that 1 of them takes off - and you get to move up the food chain.

And there comes the question of convertible note or equity?

Before you answer that - you need to ask yourself - Do I want one of the seats on this rocket?

Direct equity at founding stage is for adrenaline junkies.

Direct equity at seed stage is for whom the thrill is in the kill - they understand the risk that they may die

Convertible note at seed stage gives you the option of a bigger upside - if the rocket company needs more time to stabilise. The downside is that you might get a smaller piece of the pie if the rocket takes off and no one dies

Direct equity at Series A is the big boys getting into the game. This is when convertible note owners get into the game - when the risk is significantly lesser.

IPOs is when the rest of us have a shot.

If angel investing is an area of interest, I highly recommend reading 'The Power Law - Venture Capital and the art of Disruption'

Some takeaways from the book

• Venture Capital is apparently short for Ad(Venture) Capital.
• As an angel investor, getting a seat on a rocket is an incredible privilege
• The key aim is to derisk as much as possible
• Respect the Power Law - 80% of startups will likely fail - Don't beat up founders whose companies fail. Help them heal from their battle scars for the next one. or maybe get a job at another startup
• Don't ask for a seat upfront - or the seat with the best view - the founders aren't in the seat for the view - they need to be in that seat so they can see where they are going - Joyrides will come. Just not at seed stage or for a couple of years.

If you have read the book, feel free to share what stood out for you.

Cheers

Abhik