IntenseDebate - Bill Burnham

14 years ago @ Burnham's Beat - Why Convertible Debt I... · 0 replies · +1 points

I think convertible debt with a cap can actually be the best deal from an investor's perspective and the worst from an entrepreneur's perspective. From an investor's perspective you are basically getting fixed price equity but with the senior position and protections of debt. From an entrepreneur's perspective, they are stuck with debt that can be called and throw them into liquidation but also has a set price. I don't know what the upside of having convertible debt is in that situation. Thus, from my perspective, if the entrepreneur is going to agree to a cap they might as well just do an equity financing as they get the money free and clear and don't have any potential creditor issues.

That said, if the debt really is going in as a classic bridge-to-close, I don't see convertible debt with a cap as a bad move for either party, but this is only in situations where the round is definitely going to close in the next couple months one way or another. I would do a convertible debt with a cap in a true bridge-to-close situation however only if A) the note had a very short term, i.e. less than 6 months, probably 3 months B) the conversion price in the absence of a qualified financing was at a discount to the cap.

14 years ago @ Mendelson's Musings - The Convertible Debt D... · 1 reply · +1 points

Wow. I feel your pain! Great examples of the downsides of convertible debt that can only be learned the hard way. I think most Silicon Valley people would say "well, this doesn't sound like a start-up and no one I know would pursue a debt like that" but what they don't realize is that it only takes one note holder to cause problems and it is *much* easier to cause problems when you are a noteholder vs. a shareholder.

14 years ago @ Burnham's Beat - Why Convertible Debt I... · 0 replies · +1 points

That a start-up is better off with a creditor vs. a shareholder is a counter-intuitive position to take. You should duke it out with Jason on this issue as I'd be curious to get his take and would enjoy watching the debate!

14 years ago @ Burnham's Beat - Why Convertible Debt I... · 2 replies · +1 points

Hi Scott,

Thanks for the legal insights. I'll let you fight that one out with Jason as I know he can put up a good argument on legal points, but the point is well taken.

I guess it's probably safer to say then that convertible debt will put you in the zone of insolvency a lot sooner whereas you don't have to worry about that with a straight equity deal. My larger point is that converts aren't the complete free ride they are made out to be and that there are legal and control risks an entrepreneur assumes with a convert that they don't with a straight equity deal.

14 years ago @ Burnham's Beat - Why Convertible Debt I... · 0 replies · +2 points

My preference is to do an equity financing. I like doing a very basic preferred stock and calling it a "Series Seed" or something like that. If the founders are putting in cash I encourage them to put their cash in this way instead of just paid in capital because by putting it in as preferred they at least get protective provisions on their cash. I think preferred is better than common stock because it lets the angels and founders shape the terms of the Series A financing by setting a precedent.

In terms of terms of dividends/interest, preferred stock issues include dividends but they are "when and if issued" so in most cases you never really get any. The main reason that preferred stock has a dividend is that according to the IRS it needs one in order to be considered a preferred stock. So the dividends are really just an artifact of tax law, however in later stage financings it's not unusual to see real dividends. Convertible notes contain interest for the same reason: the IRS requires it to consider it a note, but almost all contain provisions to convert all the interest to equity, so the interest is really just a small additional discount at conversion. All it really does is enhance the warrant coverage a bit.

14 years ago @ Feld Thoughts - The Internet Makes DC ... · 2 replies · +2 points

In terms of Bilski, isn't the long term issue here Congress, not the Supreme Court? Granted the court could "fix" everything in one fell swoop, but setting the standards for patents is supposed to be the responsibility of Congress. To me, focusing on the Supreme Court just lets Congress of the hook for bad policy and allows the Congress to continue abdicating their proper role in order to protect themselves from actually having to take a vote on a controversial topic.

14 years ago @ Burnham's Beat - Carried Interest Deal ... · 0 replies · +6 points

LOL! How true. As someone who was an early stage VC for 5 years, generated over $100M+ in net profits and never got a single carry check I agree wholeheartedly! Now if you’ll excuse me, I have to get back to debating how many angels fit on a pin head …

14 years ago @ Burnham's Beat - Carried Interest Deal ... · 3 replies · +6 points

Well the main point of this post is simply to highlight that I think VCs (of which I am no longer one) will figure out a way to work around these rules, but in terms of your particular argument “VCs don’t deserve capital gains because their work is not as valuable as entrepreneurs” I would disagree, although not completely.

VCs are basically in the business of efficiently allocating capital, some do a good job, some do a bad job. The efficient allocation of capital is arguably a very important task in any capitalist economy, so it makes sense that the tax code would provide incentives for it. I actually agree that in the grand scheme of things entrepreneurs are more important the VCs, but from a tax policy perspective, I think you need incentives for both to deploy capital efficiently. As I said in my first post on the topic, I think adjusting the tax basis of VCs to account for fees might be one way to make sure they are actually taking a risk in deploying capital.

If VCs didn’t take a salary and simply invested their time, reputation, contacts etc. into an investment, do you think they would deserve capital gains?

14 years ago @ Burnham's Beat - Carried Interest Deal ... · 0 replies · +6 points

Hi Paul,

I agree that making the case for tax incentives that promote investments that ultimately exponentially grow tax revenues is the good theoretical approach to take, but I think the problem with trying to take that “high road” approach is that investment managers make an easy political target, so no matter how good a theoretical argument you make, it really doesn’t matter because this is really just about money and power politics. In fact, I’d go as to say that the NVCA made a major mistake in trying to separate VC from PE and Real Estate. The way you win political battles is not by isolating yourself, but by building as big a political tent as possible. Just one more example of Silicon Valley not having a clue about how DC operates. You should talk to some of your LA buddies and figure out how all the Hollywood types are beating the system J

Bill

14 years ago @ Burnham's Beat - Carried Interest Deal ... · 0 replies · +5 points

Thanks for the link. I would still have to disagree. I think the question to ask oneself is this: if a VC did not get a salary, but instead invested all their labor and intangible assets into making an investment successful, do they deserve capital gains treatment on any gains on the investment? I don’t see how it’s logically consistent to say “no” to this question but at the same time maintain that an employee/founder of a company does deserve capital gains treatment for their investment of time/intangibles.

Of course it doesn’t really matter what I think because Congress isn’t trying to engage in some high minded debate tax incentives, they are just trying to raise some quick cash. Regardless, I still think that VCs and especially private equity shops will figure out a way around these regulations, or at least try like mad to.

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