Once again we continue our series on convertible debt deals. Today’s subject is early versus late stage dynamics.

Traditionally, convertible debt was issued by mid to late stage startups that needed a financing to get them to a place where they believed they could raise more money. Thus, these deals were called “bridge financings.”

The terms were basically the same unless the company was fairing poorly and there was doubt about the ability to raise new capital and / or the bridge was to get the company to an acquisition or even orderly shutdown. In these cases, one saw terms like liquidations preferences and in some cases changes to board and / or voting control come into play. Some of these bridge loans also contained terms like pay to play.

Given the traditional complexity and cost of legal fees associated with preferred stock financings, however, convertible debt became a common way to make seed stage investments as it tended to be simpler and less expensive from a legal perspective. Over time, equity rounds have become cheaper to consummate and the legal fees argument doesn’t hold much weight these days. In the end, the main force driving the use of convertible debt in early stage companies is the parties’ desire to avoid setting a valuation.