When is Convertible Debt Preferable to Equity Financing a Startup - Slava Rubin

In Chapter 8 of 12 in his 2011 Capture Your Flag interview with host Erik Michielsen, IndieGoGo co-founder and entrepreneur Slava Rubin answers "What Factors Informed Your Decision on Whether to Use Convertible Debt or Equity Financing?" Understanding money source - sophisticated vs. non-sophisticated - is a fundamental first step. Sophisticated investors, which includes angels and venture capital firms, tend to have more valuation experience. Non-sophisticated investors, which includes friends and family, tend to be less valuation savvy. Rubin notes convertible debt financing offers valuation flexibility good for working with non-sophisticated investors. Given the lower startup costs and increasing number of non-sophisticated investors entering the financing pool, many early stage startups are choosing this over equity. Rubin is co-founder and CEO of IndieGoGo.com, a crowdfunding startup whose platform helps individuals and groups finance their passions. Before IndieGoGo, Rubin worked in management consulting for Diamond Consulting, now a PWC company. Rubin founded and manages non-profit Music Against Myeloma to raise funds and awareness to fight cancer. He earned a BBA from the Wharton School at the University of Pennsylvania.


Erik:  What factors inform your decision on whether to use convertible debt or equity financing?

Slava:  Yeah, I mean I think it’s really important, especially today, as you’re able to accomplish a lot more with your business and prove a lot more with less money, it’s really important to decide where your money is coming from, whether that be coming from institutions, or from angels who are sophisticated, or maybe just friends and family, and as you do that, what you don’t wanna do is get stuck with evaluation from people that don’t really, should we say, have an understanding of your business and aren’t really experts in doing evaluations.  So it’s really important to know how much money you’re trying to raise and where you’re at in the life cycle of your business.  I think you’re seeing a lot more people using convertible debt these days because it comes much quicker, there’s a lot less terms, and you’re finding a lot more money from folks that aren’t official, sophisticated VCs.  So with all that new money on the table, you don’t want to lock yourself down with evaluation that might not be appropriate whether it be too low or too high, so convertible debt is definitely interesting for folks in the earlier part of their process.  From a VC investment perspective or equity, there comes a point where folks need to know exactly how much they own, and they like to know their percentages and how much they’re gonna be involved in the company.  So as you get further into the life cycle, I think that becomes really important.