Why use Series Seed Documents instead of capped convertible debt? This seems to be the real issue. In my opinion, the reason that capped convertible debt is the current market leader is that entrepreneurs have been conditioned over time to believe that convertible debt is (a) faster (b) cheaper and (c) better for them than equity investment. This is EXACTLY why I created the Series Seed Documents. With Series Seed:
· Costs should be roughly the same (if not cheaper) than using industry standard debt documents. There are a number of different convertible debt documents out there and there will likely be some back and forth whereas these are standard documents.
· Same point for speed. If parties agree to Series Seed Documents, should be faster than debt documents since there is some negotiation with debt documents from sophisticated investors.
· Series Seed Documents are transparent: no hidden gotchas can get served up in definitive documents. You can review the right now if you want.
· Equity documents give investors more clear definition around rights, more stability and less potential squabbling in the next round.
· Equity gives investors the opportunity to get long term capital gains tax treatment if early exit.
· With minor manipulation, Series Seed enables multiple board structures without tortured and non-functioning agreements (a real problem for convertible debt documents); and
· Entrepreneurs get price certainty instead of the lower of two different prices as with capped debt.