Convertible Debt is generally more favorable to startups than a Price Round (Equity) because it allows us to punt the valuation to a later date, ideally when we are worth a bit more.

We’re basically saying to investors:

1. We don’t know the Valuation yet, so let’s reserve that decision until we are a more mature company.
2. BUT we’ll set a “Valuation Cap” on how high of a Valuation you will ever pay,
3. AND we’ll give you a “Discount Rate” versus what the next investor pays so your money goes further than theirs did.

We’ll explain the details of Valuation Caps and Discount Rates next.