Question
Angel investors take a much higher initial risk with any startup and for that reason they deserve to have a higher upside potential when compared to investors coming in the future rounds. On the other hand, entrepreneurs should not agree with the terms of a convertible note that will make it hard to raise money in the next round. What terms should a convertible note include so the angel investors, entrepreneurs and future round investors are happy?
Answer
Fair is subjective. Without a cap of some type - the entrepreneurs generally get a better deal because the valuation is completely at the determination of future investors. With a higher discount, liquidation preferences, cap, protective covenants, tend tilt the scales towards a favorable deal for investors. SAFE notes created by Y-combinator tend to solves many of these issues.
