cost differentials between a priced round and a convertible note. (Notes have traditionally been viewed as faster and cheaper financing instruments because they’re not as complex, but having quality seed documents available for free negates this advantage.) Additionally, if thinking like an investor, I’d be more personally invested in a startup where my capital is put to work in exchange for a piece of the company.
We’ve been lucky in the sense that a good chunk of our angel investors have been very supportive and active in promoting our success. In one instance, though, the note uncovered a misalignment of interests between our company and the note holders. We wanted to raise an accounts receivable line of credit for our business, and the bank wanted to subordinate all of the existing debt below the A/R line (something that’s a very common practice, as outstanding A/R is considered to be strong collateral to collect against. Banks provide low interest rates on A/R lines on the assumption that should something go wrong, they can collect on A/R before the other creditors get paid and get out without too much exposure). However, our $1 million note holders were very vocal that their convertible note was not to be subordinated, and I completely see their perspective. They were the first ones to believe in us-they did not want anyone usurping their primary debt position, no matter what the reason.
One of our note holders helped me broker a deal that allowed for the A/R line to go through, but the potential for a conflict of interest became very apparent to me based on this scenario, and I’m sure it was also distasteful to the note holders. This problem would’ve been completely avoided had we done a priced equity seed round. If you’re looking to raise your first round of angel financing, I’d recommend you look past the convertible note. It may feel easier now, but the potential for conflict will be there later, and you don’t want anything distracting you from growing a successful business.
In the end, what matters the most is the entrepreneur’s unwavering commitment to creating something from nothing. My hat is off to other entrepreneurs heading down this path, and I hope our experience can enrich yours.
Author: Daniel Odio
Daniel R. Odio is CEO and co-founder of PointAbout, Inc., a mobile development and platform company. PointAbout specializes in creating a Mobile Services Layer and robust enterprise mobile app creation for the world’s largest brands including Disney, Newsweek, The Washington Post, Gannett, GM, OnStar, Cars.com and Politico on leading platforms including iOS, Android and Windows Phone. PointAbout was named a worldwide top 3 mobile app development company by FastCompany magazine and won a Webby in 2009 for its Obama Inauguration app. PointAbout was ranked #11 in the Technology 500, with 1,072 percent revenue growth in 2010 (see related VentureBeat story) and a Top 100 private company by AlwaysOn.
PointAbout also created AppMakr, the largest Do It Yourself mobile app creation platform for iPhone, Android and Windows Phone apps. AppMakr is used by brands like PBS, Newsweek, PGA TOUR, Harvard Business Review, US Congress, MacLife, Accenture and thousands of others. Over 1.5 percent of all apps in the iTunes App Store were created using AppMakr.
Previously, Daniel earned his Series 22 & 63 securities licenses and real estate broker’s license to start Cardéa Commercial Real Estate Advisors, a commercial real estate brokerage specializing in tax-efficient real estate investments, and DROdio Real Estate, Inc, a residential real estate brokerage. Daniel also served on the Board of Directors for the Virginia Association of REALTORS and his real estate endeavors were featured on the cover of the The Wall Street Journal’s Marketplace section in July 2004.
Prior to real estate, Daniel was the VP, Sales of AcceleratedServers, a Beowulf supercomputing cluster company whose customers included the Department of Defense and Paramount Pictures.
Daniel has been featured on CNN, CNBC, TLC, Forbes, BBC and many other publications for his innovative use of technology in industries ranging from real estate to computer servers and mobile phones.
Daniel was a member of General Electric’s Technical Leadership Program. Daniel worked for GE in Latin America, including Brazil and Argentina. Daniel graduated from the University of Virginia with a BS in Commerce, speaks Spanish and Portuguese, and resides in San Francisco, CA with his wife.
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