In the most recent Mind the Gap report, we found that ~75% of the 23 surveyed startup-focused gap funds (business formation, business growth) were structured to accept equity (70%)/convertible debt (30%) as a return/repayment strategy.
This recent article from Fortune, suggests a convertible equity versus convertible debt strategy for pre/seed staged-companies. A traditional convertible debt approach (while providing the funding group a legal ability/authority to clawback loan amounts) can put stress on the start-up when raising additional capital (due to debt on the balance sheets).
Convertible equity puts more power in the hands of the issuer (or start-up) to either payback initial loan OR convert all/parts of loan to equity during a raise scenario.
Perspective is everything in this deal, and generally starts and ends with the source of the funds. If you are a gap fund managers with near(er)-term financial returns or dealing with a smaller, relative-fund base/number of deals you may be more inclined to have more control/access/authority that you get in a convertible debt scenario.
However, if your fund is aligned with economic development impact, structured to take more risk on more deals, or incentivized to longer term returns, you may find the convertible equity is a better vehicle and more welcoming to follow-on investment partners.
What have you used in structuring past agreements with start-ups? What are are you experiences? Please share in comments section below.