This past weekend, Fred Wilson's post on AVC, Convertible Debt, set off a firestorm of comments (253 to be exact). Fred argued that he dislikes convertible debt versus priced rounds since it is not entrepreneurial friendly (capped price but full ratchet on the downside). Others argued the other side, stating that rounds close faster and without needing to get all investors to agree to a single price.
We have a unique perspective in that we have both a Los Angeles office (where convertible debt seed rounds are common) and a Chicago office (where they are non-existent for VC rounds). As Fred alluded to, the rise of these convertible debt VC rounds are being driven by the frothy markets we are in. With Valley firms flying down to LA, rounds go quickly and firms do everything they can to get deals locked up before others get involved. Entrepreneurs play off of this dynamic and push for convertible debt as they have been advised that priced rounds are more complex, time consuming and force them to give up more control (board seats, etc).
In Chicago, deals don't have such a rushed pressure on them. There is not a drive to quickly close the round and lock up the deal. VC's can take time to do diligence on the deal and work through the details of a priced round. Once the market turns down, I expect there to be a lot fewer VC convertible debt deals. Time to close and the manic pressure to "win the deal" will dissipate. Fred is correct in that convertible debt is not entrepreneur friendly. If the pricing was not capped at where the priced round would likely have been, then entrepreneurs would potentially benefit from a higher Series A. However, they are capped but they have full downside exposure.
