How Convertible Debt Works

Last night I gave a talk hosted by SVB at their Palo Alto office. It was part of the “Never Ending All Old Is New Again Venture Deals Book Tour.” I had a ton of fun talking to and answering questions from about 75 entrepreneurs who – at the minimum – enjoyed eating the great food and wine that SVB provided on a luscious evening in Palo Alto. Oh – and I signed a bunch of copies of Venture Deals.

Several questions came up about Convertible Debt. We touch on it in Venture Deals but realized that we didn’t cover it in enough depth so Jason recently wrote a Convertible Debt series on Ask the VC. The series is now complete – here are the links to the posts in order.

If you feel like we missed anything, or got anything wrong, or were confusing in our explanation, please chime in on the comments on the post. If you want to see an actual convertible debt term sheet or the actual legal documents, take a look at the TechStars Open Sourced Model Seed Financing Documents.

As a bonus to the evening, I got some direct, constructive feedback from one of the attendees via email later that night. While the “thank you” and “good job” notes are nice, I only learn when someone criticizes me (hopefully constructively, but I can handle it in any form.) The feedback was:

May I make a constructive criticism regarding your talk tonight? Your answers to audience questions tend to be overly long and rambling… “overanswer,” to invent a word.  You start strong and respond right to the essence, but then your focus blurs and you keep taking verbal baby steps away from the thought stream. If you trim a minute or two off each answer, you can call on more people and hear more questions, which sends more people home happy. I think if you self-critique a video of yourself in a Q&A session, you’ll arrive at the same conclusion. 

It’s a good suggestion. I often try to provide additional context to the question, but it sounds like – at least for one person – I went off on a few space jams that weren’t additive. I love the phrase “overanswer” – it’s a lesson from TV interviews 101 (e.g. just answer a question – any question – quickly). Something to ponder as I continue the Never Ending All Old Is New Again Venture Deals Book Tour.

  • C H Weber

    I am always looking for constructive criticism and unfortunately the people around including my bosses and my peers are reluctant to provide it to me especially after i do a talk or a presentation.  and i am pretty laid back guy, so they cannot be scared that i am going to be annoyed or pissed off.  Oh to get some constructive criticism…i can only wait…

  • Brad, I heard this at an event recently, and I’ve decided to be cognizant about it for the rest of my life, “If you really think about it, you can make it brief.”

  • very cool post! thanks!

  • Brad, in a manner I disagree with the “constructive criticism” above and it’s not for your protection (you don’t need it anyway). An expert of a certain field differs from a search engine to the effect that he or she can go around a topic and enlighten the audience in a wider sense. The book Venture Deals is a good one because it’s going criss-cross through a topic. I’m reading Mark Suster’s blog because he does the same by including real stories to learn from. Keep up your style. Constructive criticism is important but the above advise should be handled with care.

    • Agreed. That said, I’m going to try to have somewhat shorter answers (but include the story telling) so I can get more questions in. We’ll see how that plays the next few times I talk.

  • I really liked the event. Venture Deals taps into a concept that most people don’t know much about. Since you are the credible source of knowledge, people are always going to ask tons of questions.  I could of asked at least 5 more questions at the event.  People want to ask more questions because your experience and willingness to help entrepreneurs is something you cant find on Google.  Keep Blogging. *Buy Venture Deals

    • Glad you liked it. I’m going to adjust my style some for the future events and focus on shorter answers to I can cover more ground.

  • Fantastic article. Thanks for the great insight

  • James Mitchell

    By doing this, you run the risk of underanswering.

    The best approach is to be interactive. Provide the short answer. Focus intently on the questioner to see if he understands your answer and try to determine if he wants/needs more information. If he does, go into overanswer mode.

    Then look around the room. “Does everyone understand what I just said?” “Does anyone want more information?” The problem is that a lot of people are shy and some are afraid of asking “stupid questions.” So you have to develop a feel for the audience.

    An exampe: Someone asks you, “At what age did you start your first company?” He might really just want to know the answer. In that case, all you need to do is to say the number. Or what he might really be asking, but is not saying is, “I am 23 and I am wondering if I am too young to start a company.” In that case, just saying the number is not really telling him what he wants to know.

    I much prefer to interact with people that provide oral feedback. Sometimes you are just talking and talking and you have know idea what they are thinking. It could range from “This is exactly what I want to know” to “I don’t understand a word he is saying” to “What he is telling me is incredibly obvious, why is he wasting my time?” to “He is not answering my question.”

    I myself tend to be very verbally aggressive with people. I interrupt and try to make it clear what I want to know. In many cases, with a new field, I do not want the entire story, I want it fed to me in bite size chunks. I chew on it, absorb it, and only after I do am ready for the next chunk. At some point I will say, “TMI” (too much information) and then it is time to move on. Some people respond well to this, others don’t.

    • James Mitchell

      I forget to add — I like your two books but for me, you wildly underanswered on most issues. On choice of entity, Do it Faster ignored a ton of points — i.e., readers should know that S corps are limited to 35 shareholders, none of them can be foreign shareholders, certain types of shareholders are not allowed. At a minimum, i think there should have been URLs for additional information. (Not necessarily something you wrote, but other sites would be fine.) One might say just google it but the fact is that google is fundamentally broken and the spammers have won, so it would be help to list the good sites out there for additional information.

  • Yesuifen20

    d eating the great food and wine that SVB provided on a luscious
    evening in Palo Alto. Oh – and I signed a bunch of copies of Venture
    Several questions came up about Convertible Debt

  • Davidgraulich

    On the subject of the length and quality of answers……there have been studies done after jury trials, in terms of what the jurors remembered from the lawyers’ opening and closing statements. It turns out that jurors usually remembered the FIRST thing that was said and the LAST thing….everything in between was in varying degrees of blurriness.  In law school they call this the concept of “primacy and recency.” Start your argument with something smart, concise and memorable, and tie back to that same idea when you conclude. Your opening and your summation are what sticks. Everything in between should be good, but don’t expect the jurors (or the book-signing audience) to remember it. — Dave Graulich, Fair Oaks, CA 

    • Yup – I’ve heard this many times and totally believe it.

  • Pedro

    thanks for this.  Good stuff.

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