Friday, October 07, 2011

Would convertible debt burden me?

As I've written before, I'm currently working on two side projects in my free time. This post is an update about their progress.

For the one I'm doing with a co-founder, it's pretty much stalled. It requires significant capital investment and some brick-and-mortar business networking thus we can't start from zero. My co-founder has pitched to some VCs all out, but apparently the conventional wisdom is true: you can't really get investors just by selling idea. At least not when you're nobody.

For the other one, a classifieds for room rentals (the idea is much bigger than that, but I must start from something small), it's been going slow. I thought of speeding it up; quit my full-time job and give the project all the love. That's why I was thinking of raising MYR 75k (USD ~23.7k or IDR ~210m) in convertible debt to fund the project for at least 6 months.

I cold emailed some people (only two, actually. A CEO in a company I worked for and an acquaintance I met in airport), asking whether they know anyone interested to angel invest in my project.

The latter forwarded my email to her business partner who then asked for a pitch. To my surprise, he showed deep interest on our first meeting, and immediately showed intent to invest after reading my financial projection (which I think quite conservative on number).

In case you're curious, here's my proposed term:
  • 8% interest p/a
  • 25% discount
  • with cap
  • maturity at 1 year
I think it's pretty much standard. But then the guy said that he "doesn't like the idea of giving loan" because he "doesn't want to burden me". He wanted some shares instead. This is his offer (more or less):
  • Start the company in Malaysia so we can get government grants and stuff, but it must be majority owned by local, so he proposed...
  • 60% for himself (being a Malaysian). And because his business partner (my friend) introduced us, so...
  • She'll get 20%.
  • Maybe he doesn't really trust me, so the money will be dispensed monthly, and...
  • I must get his permission for any expenses.
To summarize, the company would get USD 23.7k spread over 6 months period, I would get 20% share and less than half my current salary, and I must report everything. I've never dealt with any investor before, but I don't feel right.

My friend jokingly said the money I need is around the price a car, might as well I borrow it from bank and keep 100% share for myself.

I emailed the investor politely rejecting his offer. Here's a snippet of the letter:
You've been very gracious with your time and I'm thankful for that. After careful consideration, however, I have decided not to take your current offer. I have asked around and did some research, convertible debt is still the term I want. 
There's a great article on the benefits of convertible debt,, where the two main points (for me) are Suitability (point 2) and Control (point 3). It is also investor-friendly when complemented with discount and cap.
I guess I'll keep doing this as a side project until I can stand on my own or found more sensible investment.

1 comment:

  1. You shouldn't even consider his offer. 60% for a first round (and that little of an investment!) is ridiculous. In fact, most investors don't *want* to take anywhere close to that amount because it *considerably* reduces the amount of incentive you have to put your all in to the company. For reference, incubators give around that amount of money and take 5-10%, but much of even that is for all the additional support they give you.


Looking for my geek side?