Convertible debt — hold the debt

We do a lot of convertible notes at goodcounsel, so we try to keep with the state of the art.

A year or so ago, some West Coast incubators teamed up with the Wilson Sonsini law firm to create a type of convertible equity for seed, financings intended to replace convertible debt. Convertible debt minus the debt. (TechCrunch story here.)

It’s not as if convertible equity is a new idea. Typical Series A preferred is a form of convertible equity — convertible into common stock. The innovation is to create a version of it that is equally as simple as a convertible note.

Anyway, within the last few days, Y Combinator, whose co-founder Paul Graham a few years back declared that for seed financings, Convertible Notes had “won,” has announced that it has developed its own version of a simple non-debt convertible security called “SAFE,” which stands for “Simple Agreement for Future Equity.” You can read Paul Graham’s post about SAFEs here, and a post from Yokum Taku of Wilson Sonsini about his version of convertible equity here.

It seems safe to say (ha!) that non-debt convertible seed financing is gaining some serious adherents, at least on theWest Coast. This makes sense, since at least one of the factors driving this innovation is California-specific: convertible debt with maturity of longer than one year can run into problems with the  California Finance Lenders Law.

The posts linked above explain the perceived practical and legal benefits of this new approach. More to come.

Categorised as: Capital Structure, Fundraising, Startup Stuff