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Rick Morrison
CEO and Founder at Comprehend Systems - http://www.comprehend.com
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There is one other big advantage for entrepreneurs of convertible notes, either capped or uncapped: they can be closed quickly. An entrepreneur can walk into a meeting with an angel and leave with the signed investment paperwork. There is no need to coordinate with lawyers or other investors. This is both appealing and can be extremely valuable to the entrepreneur. It prevents investors from wasting the entrepreneur's time and ultimately not committing, or having to wait for several extra weeks/months while the round is put together. The entrepreneur can get back to building their business instead of fundraising. If a reputable angel or VC fund wants to do an equity angel round, then it makes sense. But a lot of angels are non-committal, sometimes even damagingly so. By using convertible notes, the entrepreneur can force them to decide quickly or miss out. Valuation caps are necessary because a lot of investors don't invest in uncapped rounds. There are problems with capped notes as outlined above, but the benefits are also very appealing.
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Sep 7, 2011