Join our community and get the newsletter and AI Cheatsheet: theWealthElevator.com/angel
In this episode, the host walks angel investors through a simplified hypothetical convertible note deal for a revenue-generating, bootstrapped company raising about $1M, mostly filled by a VC, with room for smaller passive checks. He explains key terms including a 7% simple interest rate, five-year maturity, an automatic conversion trigger tied to a future equity raise of at least $1.5M, and a low seven-digit valuation cap, illustrating how a cap (e.g., $10M) can create favorable conversion pricing in a higher-priced next round. He stresses that no single term (like the cap) determines attractiveness, and investors must evaluate how terms work together, whether a discount exists, and whether the cap is justified via fundamentals and comparables. He clarifies that “downside protection” on an unsecured note is limited, maturity dates may be meaningless without cash, and liquidation preferences only help if proceeds exist. He also warns against groupthink around credible lead investors and emphasizes personal due diligence, appropriate check sizing, and diversification.
00:00 Welcome and Setup
00:42 The Hypothetical Deal
01:23 Convertible Note Terms
02:32 Valuation Cap Basics
03:40 Discounts and Conversion
04:35 Is the Cap Reasonable
07:01 Comparables and Deal Flow
08:02 Downside Protection Myth
11:00 Maturity Date Reality
11:48 Lead Investor and Groupthink
13:12 Risk Luck and Wrap Up
","author_name":"Lane Kawaoka"}