Back in the summer of 2010, I wrote a post outlining why I don't like convertible debt investments. USV does a fair bit of seed investing and we have never done a convertible debt deal (although we have done bridge loans for our existing portfolio companies). My wife, aka Gotham Gal, does a fair bit of seed investing and she has done her share of convertible debt investments, always with a reasonable cap, but she also prefers a priced equity round.
Convertible debt is being discussed again, I suspect because valuations are coming down and that is causing some problems, but also because there are folks suggesting improvements on the structure of these deals.
My view on this is fairly simple:
1) A priced equity round can be done quickly and inexpensively. Most experienced venture lawyers have a standard form of "lightweight Seed" or "lightweight Series A" documents that can be signed without negotation on both sides. We do this all the time.
2) When you set the price, both sides know what deal they got. It's locked in and they are in business together and aligned. The entrepreneur can't get screwed later when the price drops on them. And the investors can't get screwed later when the price jumps on them. This is a big deal. I don't understand why folks don't understand it.
3) Equity is simple. You own what you own. Debt is complicated. All sorts of things can happen with it, including bad things.
My hope is the market moves back to priced rounds for all things including seed and angel deals. It's a better, simpler, and massively less complicated way to do venture investing.