Convertible Notes vs. Equity

Over at AsktheVC someone asked:

"Should Entrepreneurs Be Worried About Convertible Notes as a First Financing Event?"

Jason provided a pretty good answer to the entrepreneur's specific question and I commented about the broader question of VC vs. Angel comfort with convertible notes. It's worth a read for anyone facing this question. I've copied my comment below:

"It can differ by geography, but I'd say that convertible notes are the exception for institutional rounds; whereas they are quite common for angel rounds.

Unless deal speed is critical or there is a huge gap in valuation expectations, VCs aren't interested in their dollars converting into a valuation their dollars helped create. Unless the VC goes there, I wouldn't spend too many cycles trying to go debt instead of equity. You want everyone aligned and equity does that best.

Angels can differ widely, however, and if they will accept convertible debt it might be worthwhile. It avoids the valuation dance with an angel and the risk that such a dance results in a valuation that will create problems for the next round. Of course, they may have the same concern as VCs (e.g. their dollars working against their conversion valuation), but not as often.

If it's a close call, I'd err toward solutions that keep everyone aligned..."