Aaron, my take on convertible debt is quite different. You have said: “If an investor ever recalled a loan on my startup, it would have killed my company and the investor would lose all the investment anyway”. Well, it might be true in some cases, but the fact that calling the loan forces the company to file for bankruptcy - could be used by some investors to buy the struggling company “for a song”.
You see, the debt holder, or the so-called “debtor in possession” - could file a “restructuring” proposal with the bankruptcy court. If approved, the existing shareholders lose all their equity as the shares become worthless. The new equity holders can then issue new shares from the treasury – and walk away with the full ownership.
The above scenario couldn’t have happened using SAFE financing. I have experienced such malicious behavior resulting in a “change of control” first-hand. And I do not wish any entrepreneur to go through the same. You’ll be surprised how many times companies are forced into bankruptcy by greedy and unscrupulous investors. My advice: beware of the debt and chose equity financing instead…
Aaron, my take on convertible debt is quite different. You have said: “If an investor ever recalled a loan on my startup, it would have killed my company and the investor would lose all the investment anyway”. Well, it might be true in some cases, but the fact that calling the loan forces the company to file for bankruptcy - could be used by some investors to buy the struggling company “for a song”.
You see, the debt holder, or the so-called “debtor in possession” - could file a “restructuring” proposal with the bankruptcy court. If approved, the existing shareholders lose all their equity as the shares become worthless. The new equity holders can then issue new shares from the treasury – and walk away with the full ownership.
The above scenario couldn’t have happened using SAFE financing. I have experienced such malicious behavior resulting in a “change of control” first-hand. And I do not wish any entrepreneur to go through the same. You’ll be surprised how many times companies are forced into bankruptcy by greedy and unscrupulous investors. My advice: beware of the debt and chose equity financing instead…
Wow! Thanks for sharing. I'd never heard of someone doing this.
It's good to know. And it's a good reminder to be careful about who you take money from!