One major problem with convertible debt in that it is fundamentally debt with an X year term and Y% interest rate. If the startup chooses not to raise further capital, the note does not dictate what is done (at least ours didn't).
This isn't much of a problem if your investors are really nice, smart people. But if they aren't...
I've had the experience of a non-entrepreneur-friendly investor calling the debt (e.g. demanding repayment after the term had expired) at a time when our startup couldn't make a payment of that size. They refused to extend the term. The investor then threatened to liquidate the company if we didn't pay them back.
Some of my cofounders had made money in the past, so we repaid the debt by having them lend money to the company. But I'm not sure what we would have done if we didn't have that option.
One major problem with convertible debt in that it is fundamentally debt with an X year term and Y% interest rate. If the startup chooses not to raise further capital, the note does not dictate what is done (at least ours didn't).
This isn't much of a problem if your investors are really nice, smart people. But if they aren't...
I've had the experience of a non-entrepreneur-friendly investor calling the debt (e.g. demanding repayment after the term had expired) at a time when our startup couldn't make a payment of that size. They refused to extend the term. The investor then threatened to liquidate the company if we didn't pay them back.
Some of my cofounders had made money in the past, so we repaid the debt by having them lend money to the company. But I'm not sure what we would have done if we didn't have that option.