Here's the thing that's left out of this investor-friendly analysis, and why Suster is wrong about the "irrationality" of no-cap deals: For smaller angels, access to the deal itself is valuable.
Small investors don't have access to Series A. That's why the analogy with the stock market is broken:
"Can you imagine investing in the stock market where your price was determined at a future date and the better that company performed the HIGHER the price you paid for that investment."
The reality is angels don't have the option of purchasing the stock after the seed round. So, it can make perfect economic sense for an angel to pay a premium to get access to a deal. And if that premium comes in the form of pre-paying for a chunk of the Series A (one way to look at a no-cap deal), that can make sense -- perhaps even more sense that an enhanced seed valuation would. A discount would be sweetener on top of that. But to be clear: there is a rational case for smaller investors taking no-cap deals in order to get a chunk of the next Facebook, which they otherwise wouldn't be able to get.
Seed rounds present a unique intersection point for founders & smaller angels where their interests overlap. I think the bigger-sized investor community are somewhat threatened by that, and that's why we're seeing such a sophisticated campaign against no-cap convertible notes. But the climate is now competitive enough and small-angel platforms are getting enough traction that you can sense their anxiety that no-caps may be coming back, to the great benefit of founders.
I never thought of it that way, seeing series 'A' with some regularity and being a (consulting) participant in the deals I never felt the urge to invest in these deals simply because that would create a conflict of interest. But the fact that the only investments that I did do were as an angel in 3 different companies was simply due to the fact that the rounds were very early and the amounts were still low enough that they were in my 'bracket' or 'comfort zone'.
I guess if I felt the need or desire to participate in series 'A' I would join an established VC as a limited partner.
One of the reasons VCs would not like to have a bunch of angel investors join in a series A is that there would likely spontaneously combust into existence a sort of Polish Parliament and then the deal would likely fall through.
Syndicated deals have some of these aspects already, especially if the geographic and/or cultural spread of VCs is large.
Exactly: Tech angels who are not LPs in a VC fund are largely limited to the seed-stage investment market. Therefore founders can negotiate better terms (e.g. no cap).
Superangels / mini-VCs / actual VCs like Suster don't find it as appealing because they have plenty of Series A deals come their way.
But then again I bet they would bite at a really quality opportunity at the seed stage, because the best companies will seek larger funds at their Series A than what superangels can offer. (So they're not necessarily seeing the best companies at Series A.) Part of me thinks this "no cap's for suckers" blogstorm is just FUD to improve their collective negotiating position.
The only thing dumber than a superangel taking a no-cap convertible debt deal is a superangel passing on the next Facebook's seed because they didn't want to pay Series A prices. That would be incredibly shortsighted.
Small investors don't have access to Series A. That's why the analogy with the stock market is broken:
"Can you imagine investing in the stock market where your price was determined at a future date and the better that company performed the HIGHER the price you paid for that investment."
The reality is angels don't have the option of purchasing the stock after the seed round. So, it can make perfect economic sense for an angel to pay a premium to get access to a deal. And if that premium comes in the form of pre-paying for a chunk of the Series A (one way to look at a no-cap deal), that can make sense -- perhaps even more sense that an enhanced seed valuation would. A discount would be sweetener on top of that. But to be clear: there is a rational case for smaller investors taking no-cap deals in order to get a chunk of the next Facebook, which they otherwise wouldn't be able to get.
Seed rounds present a unique intersection point for founders & smaller angels where their interests overlap. I think the bigger-sized investor community are somewhat threatened by that, and that's why we're seeing such a sophisticated campaign against no-cap convertible notes. But the climate is now competitive enough and small-angel platforms are getting enough traction that you can sense their anxiety that no-caps may be coming back, to the great benefit of founders.