Yesterday, an entrepreneur asked me whether or not First Round does convertible notes. I wasn’t trying to be evasive, but after 
saying that we have done them on occasion, I pushed the entrepreneur to think deeper about his fundraising goals. To me, asking about a whether a VC does a specific security seems like the wrong question. It’s like asking an assassin whether or not he uses rifles or grenades—it really depends on the situation and what you’re trying to optimize for. I haven’t killed anyone lately, but I’d imagine that factors like range, noise, etc. might play a factor. If you’re Martin Blank, and you need to kill the President of Paraguay, you might need to use a fork. Different tools for different jobs.
So I asked him, “What are you optimizing for in this round?”
Do you care most about what investors you get to work with? Are you trying to do a note because you think it’s quicker and cheaper to close? Are you optimizing for price?
The latter seems like a silly thing for an early/seed stage entrepreneur to be trying to maximize over other factors. I’ve never heard of an entrepreneur who had a successful exit who laments the price that they raised their first round valuation at. Does that mean they should accept less than a fair deal? Of course not—but if I have a choice between SV Angel at a 4 pre-money, and Joe’s Auto Body Shop and Seed Fund at a 6 pre, I’m taking SV Angel at the lower valuation—because I know that the value they’ll bring to the table over the long run far outweighs the first round dilution. I know that if I go with the right investment partners and they help me build a better business over time, whatever dilution I take in the first round is going to wash out over time when I’m raising at higher valuations later.
If you’re talking about a quick close—I get that, but you can do that with an equity round, too. Techstars does it with their seed docs. At First Round, I feel like more than half the time we’re waiting on the company’s counsel and it’s not us that is slowing up the process. (Thx Doug!)
The point is not whether or not equity vs convertible debt is best—it’s that consideration for the optimal round dynamic should, in my mind, come somewhere after “secure the right team”, “create a great product/business”, “find the right partners”, “figure out how to get them involved”, and “figure out appropriate milestones and cash needs”. The latter is one of the most overlooked aspects of the rounds. You can shoot yourself in the face in all sorts of ways by not matching your cash needs and milestones to how much money you raise—way more than using the “wrong” security. Time things right and you can keep a lot of your business, close quickly and get lots of interest. Go out halfway to nowhere on your milestones, or having a prior round that was raised so high that you couldn’t fulfill your promise, and expect your next financing to be a really tough slog.
So, the next time you read the latest navel gazing VC debate over terms and structures, or take any one VC blogger's writings as religion, take a deep breath and think about what *your* goals are, and be open minded about all the various levers you can pull to achieve them.