I’m so tired of seeing young entrepreneurs get screwed by their angel investors on convertible notes and I know I can’t convince you not to do it so I’d like to offer one simple bit of advice to help you avoid getting screwed (at least on one part of your note). When you do a convertible note with a cap that converts into the next round of funding one of the unintended consequences is that if you’re successful and raise at a larger price than your cap the early angels often get “multiple liquidation preferences” on their dollars in. Here’s how it works: Angel gives you $500,000 at a $5 million cap (thus they will own at least 9% of your company if it converts at a price higher than the cap). If you raise at a lower price they will own more than 9%. [This is called a “full ratchet,” which is also historically a term that VCs would be crucified for trying to get away with but I’ll avoid talking about that in this post.] With a normal 1x liquidation preference this investor woul
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