Probably 1/3 of my investments have started as convertible notes. Most of them did not have a cap on the conversion price. Most had 8% interest 20% discount and no warrants. Some have converted to equity and none of those felt bad.
I guess the better the companies are, the higher the valuation will be, and the more likely you are to feel bad. So maybe I'm just not a good enough investor to feel bad. I don't claim to be a professional investor. But mine didn't feel bad.
That is the main objection of investors who don't like to do convertible notes. That between the time when they invest and the time when the note converts the company will increase in value significantly and they won't get enough credit for investing early.
In early stage companies, I think a convertible note can many times be preferrable to an angel investor who is not a a professional investor and may not know the right way to price an early stage deal.
Pricing a deal is not just about getting the lowest valuation possible. You want to set the company up for success and if the cap table is overweight and the company needs more funds than expected it's going to be a painful adjustment.
If it's really early, it's hard to know the right way to value a company. Most of the companies I invest in don't have any significant revenue yet. Rather than pick something arbitrary, sometimes it makes sense to delay until everyone learns more before setting a valuation.
If you're a professional investor, it's your job to be able to figure out early stage valutaions. You have more time than I do and more resources available in order to figure that out. I understand why you might insist on a priced round. But don't hate me because I invest in convertible notes!
