INSIGHTS FROM R. STEWART THOMPSON: To Note or Not to Note?

Fred Wilson wrote a post today about not using convertible notes if your a founder starting an investment round. The post can be found here on his Medium site and you need to read it if you are thinking about the difference between using a Convertible Note or doing a Priced Round, i.e. doing a n Equity placement.

It can be found here: https://avc.com/2019/05/unsafe-notes

I flog the use of notes quite openly, and although I don’t agree with his hope that “the genie would get back in the bottle” and the Note would go away, I still agree with 3 of his 4 points regarding the use of notes. In fact, I espouse the virtue of the Note but rarely use it in my Angel quest for the 38x return. I have said that if you think you are “the 1” and that you are going to be VC backed, price your round.. if you don’t know.. use notes. In fact the only reason I can think of as an investor not to use a note is how much of your exit you end up giving up because you subject yourself to a cap on each round.

Anyway, my response to his post was as follows, call it a Rebuttal on the Use of the Note. As an aside, we (I) never do SAFEs, ever (ok I did once). If it has terms its a Note, it doesn’t need a fancy label :). I felt that the posting of his article, plus a rebuttal, is in complete alignment with how we present the two options at Basecamp.

Here it is:

R Stewart Thompson •

Hi Fred, great post and even though I agree with 3 of the 4 points about notes, I’m still a BIG fan of them. I do have to say that I tell our companies that if they have every intention of being “the one”, a NY/Valley/Boston VC backed company they should never do a note.. drink the poison, own the choice, and drive to be one of 9000 cos that actually deliver 38x to their investors. Unfortunately as a seed investor from the non Boston/NY/Valley schtick notes are awesome.. they can be converted into debt when the company becomes a zombie and provides a way out for stuck investors, they get paid before equity if you don’t convert and a Series A VC has a mean liquidation pref in front of the seed investors, and they can become equity if things work out. As Lombardi used to say 3 things happen when you pass the ball and two of them are bad”.. I guess notes is bringing the running game back into play! As a seed investor though I’d rather always go for equity and the big prize, but not everybody gets to see the USV awesome deal flow all the time 🙂

Find the post on LinkedIn: https://www.linkedin.com/pulse/note-r-stewart-randy-thompson