term sheet vs convertible note


I have been talking to the people in angel circles and it seems that everyone takes only term sheets; and convertible notes are almost like an insult.

My questions is: when I can start offering convertible note rather than a term sheet.

Let's say the note will be for USD 1M for a year with 25% discount. How do I have to back this up to have investors actually consider it?

Is there a way to have hybrid that would be part terms sheet and part CN? Is it called anything special?

All of above is for seed round of financing.

Angel Seed Funding Convertible Note

asked Jan 18 '11 at 03:11
Mat Banik
325 points

1 Answer


Although there are some well founded criticism against convertible notes, if they're insulted, the angels you've talked to are clearly behind the bandwagon. Paul Graham, arguably the most influential person in the world when it comes to seed financing, seems to have declared Convertible Notes the winning trend. Perhaps you need to educate your angels? Kindly of course.

I would gather that a hybrid isn't going to help you. Either the angels accept that you prefer a convertible note, or they don't. I don't see why they're going to accept a partially convertible note deal. In their eyes; it's either going to be a good thing (letting someone (ie. the VC's) that knows more about these deals, than you and the angels, set the price) or a bad thing (angels paying too much for your company stock).

Sensible angels will admit the former, while possibly leaning on the latter because it may be a better deal for them.

Having been through a run like this, I think it's about how to sell it to the angel investor. A pitch can basically boil down to this; "Look, neither we, nor you have a good sense of what the company value should be right now. Luckily for us both, there are professionals who do this every day. Let's see if we can get this ship off the ground together, and then down the line you guys get your money converted into stock at a rate that is fair for everyone. And you even get a rebate. Doesn't that sound great?" Best of luck!

answered Jan 18 '11 at 04:01
John Sjölander
2,082 points
  • I know for a fact that many angels and also many top tier VC firms that claim to have never done CN deals actually have. But they're hesitant, and it's very convenient to claim to never do them. ... A little bird told me. – John Sj√∂lander 13 years ago

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Angel Seed Funding Convertible Note