Hi Matt,

A couple of your points aren't quite so cut-and-dried as you make them sound.
-- Specific to Flurry, "Java" and "low-end mobile phones" isn't as straightforward a combination as the handset manufacturers like to represent. The end-user success rate for downloading, installing, and using applications of any sort is pretty low. That's why we're completely a mobile-browswer shop for the moment (WAP, Chtml, Xhtml).
-- Regarding convertible notes, they've been the predominant seed security for years. The choice to use them has more to do with individual angels not wanting to set the price for a round, lower closing costs, fewer state regulatory requirements, et al. If the terms are set correctly (discounts for time outstanding, maximum conversion prices, unambiguous outcomes in the case of early acquisition), then the angels should be largely indifferent to the difference between the two sorts of security.

Thanks Scott. I've updated. And I think i know of a source who can confirm the general trend....will update if I get any real numbers on this.

Matt:

The "loan until you're financed" model *is* a common practice for the 1st money in. You're right about the motivations. Generally, since first money in is friends/family/angels, and that's how it works.

Now, in reality, this loan is a contract that the new investors may or may not honor, depending on the forth/fear in the market. What brought angels out in droves in the late 90s was the fact that their loans would be honored by VCs competing to the the next hot deal. As the market became dry post-2000, the bridge loans that people gave to seed a business were re-negotiated by the new investors. Sometimes the existing money was converted to Common instead of Preferred. Sometimes the Warrants [interest payment] were renegotiated away. Sometimes the old investors were just told, "you money will be worth 10% of what you put in."

By the way, this wasn't because VCs treated angels differently. When money is scarce and the existing investors are unwilling/unable to carry the company themselves, the new money always crushes the old money, all throughout the private equity food chain. The same thing happened to every VC in the valley in at least 1 deal, maybe many more. This is why VCs "reserve money" when they make an investment - to protect themselves from this.

I actually *don't* thinks seed level bridges are any more popular (as a % of financings) than they were 5 years ago. It is just that we are seeing more companies get started because the barrier to starting for a consumer web company is so low. So the absolute number is going up. I actually think the % is going down, while the number is going up, as entrepreneurs can actually start a web company with very little cash these days. This is the Entrepreneur Bubble I wrote about some time ago.

Long comment. Sorry. I can't seem to do pithy very well.

Best,

PR

Hey Matt,

I appreciate the article. To Scott's point about "Java" and "low-end mobile phones": I agree that most users don't have great success in installing applications, but to a large extent this is because they aren't familiar with the menu system on their phones.

With flurrymail, we provide detailed instructions for installation which have gotten a great response from our users. Even low-end phones that have a limit of 64k on applications work well with flurrymail and we have many users with such phones.

Thanks,
Sean

So I checked the "covertible" question with Barry Kramer, a lawyer here in Silicon Valley with Fenwick & West, who puts out a great little quarterly summary of the deal terms for venture investments. The downside is Barry doesn't track angel investment terms, he only tracks venture deals. In fact, no one tracks angel investment deal terms.

But Barry was helpful with his general description of how things work. Basically, convertibles went out of style during the boom, because so much money was being pumped into companies, and valuations were growing so quickly that angels said they wanted their own terms. Why should they wait six months, only to have valuations so sky high that they only get a piddling stake in return for the seed investment?

So they negotiated their equity portion before the A round.

But after the boom, circa 2001, investment amounts went down, and legal fees and other bureaucratic costs for all the paperwork associated with an investement began to eat into the overall seed round. So now we're back to "covertibles," which are good way to forestall all the paperwork until the A round. To reward angels for betting on the company early, the company usually gives angels some "warrants" as a kicker. There is no standard for how many warrants angels get, or when angels get them. But one example of a warrant is as follows: An angel invests $500,000, and then gets 25 percent of that figure, or $125,000, additionally as a credit to by company stock at some later point in time -- often as much as a couple of years. Wanted to fire off this comment quickly, but there may be enough here for a full post about terms later on. Anyone interested in this stuff?

would like 2 bcome a member of Flurry mail,unable 2 sign up.Thank u.

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Lisa