I don't buy the typical argument that entrepreneurs like myself have given to angel investors re: convertible bridge notes.
The typical argument (I hear and have made) in favor of bridge notes is that the entrepreneur wants to avoid "negotiating" a valuation with angels. Entrepreneurs will say:
- It's too early to set a valuation.
- Rather than "fight" about valuation today, let's put that off until some venture capitalist comes in and sets the market valuation.
Here's why I don't buy those arguments....when a venture capitalist comes in there's not going to be much of a fight on valuation. Price in early stage deals (Series A), typically are in the same zone. Venture capitalists know what market rate is and generally stay within that range for early stage companies. So, in my mind, these entrepreneurial arguments amount to effective delay tactics and surface all the problems I wrote about yesterday when it comes to bridge notes. It's much more straightforward to establish a fair valuation for the company in these seed situations and sell the stock. The valuation should not be a fight with angels either ....both sides either agree to a deal or don't. It's pretty straightforward. My belief is that entrepreneurs (cleverly) want to minimize dilution and so they use bridge notes to carry the company to a higher valuation. But as someone, who has and is willing to take the risk of really "early" money -- I believe I should get paid for that risk as an angel investor.
It's important to note that I think there is a role for bridge notes in small company financings....it's just not how they're being used most of the time today.
Disclaimer: My comments on bridge notes are specifically in relation to the use of bridge notes as a substitute for seed equity financings.