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Convertible Debt: really Bridge Loans and Equity Replacement Debt

A post from Troy on Convertible Debt and how he thinks we should really be thinking about it…

Over the last few years, convertible debt has become a popular vehicle for early stage companies that are raising money.   A lot has been written about it from how it affects your cap table to how it is good or bad for both the investor and the entrepreneur.  But there is still a lot of confusion surrounding convertible debt and its uses.  The core of this confusion stems from the language we use and the fact that there are actually two entirely different use cases that get lumped together in that one vague term “convertible debt.”  I am going to be bold and propose that we eliminate the vague term from our vocabulary and adopt a new term for each of these:

-       Bridge Loans

-       Equity Replacement Debt

Bridge Loans are used when a company has a pending round of funding but needs a little help with cash flow between now and then (usually no more than 90 or 120 days) They will open up a round of debt financing where investors receive both interest on their money invested and a discount on the next round when it closes.  This is helpful to the company to solve their immediate cash flow problems and it is helpful to the investors as they are guaranteed to be in that next round and are rewarded with a discount for taking the risk of providing the capital before all the details and all of the capital of the round are solidified.

Equity Replacement Debt is something totally different; this is when the company decided to use convertible debt in place of doing an equity round.  The capital provided will typically provide 12 – 24 months of runway for the company.  These rounds typically have a “cap” in the valuation (and may have a discount too) as the investors are taking the risk today, based on the progress that the company has made to date.  Since the valuation on the investment will be made at the next round, in the future, after more progress has been made, many investors insist on a “cap” on that valuation (“My money will go in at a maximum pre-money valuation of $xxx”).

In my opinion as both an investor and an entrepreneur, I am fine with Bridge Loans – they solve a real problem for the company and reward the investor with a better price for the addition risk that he/she is taking by providing cash before the details of the round are complete.

The Equity Replacement Debt rounds have a host of problems with them.  First the “cap” is a misnomer, it really should be called a “valuation” because it is an attempt at placing a value on what the company is worth at the time of the transaction.  But, valuation is just one of many terms that go into an equity financing, is the equity participating preferred stock or convertible preferred?  Is there a preferential return?  What are the anti-dilution provisions?  Is there any board control specified?  All of these work together with the valuation to make a fair deal.  No experienced entrepreneur or investor would establish the valuation without knowing what the other terms were going to be.  YET, it is effectively done all the time with Equity Replacement Debt!  Recently, I have seen some term sheets that attempt to spell out some of these details in the convertible debt document, inching the process closer and closer to a real equity round both in its complication to execute and its cost to complete, reducing the benefits that most entrepreneurs site for doing it in the first place.

As you see just how different these two use cases are, it is no wonder that there is confusion and debate around the issue of “Should we use convertible debt?” If we would be more specific in our language we could provide a lot more transparency and focus our energy less on fancy investing vehicles and more on building great companies!

If you agree, then PLEASE start being more specific and let’s start talking about Bridge Loans and Equity Replacement Debt rather than using a vague, generic term that just confuses the issue…


Filed under: Status Updates — Tags: — November 26, 2012

Food Genius Raises $1.2M to Help the Food Industry Understand Restaurant Trends

Chicago, IL – September 11, 2012 - Food Genius, which provides data-based restaurant insights to the food industry, has raised $1.2 million in venture capital. Chicago’s Hyde Park Venture Partners and Hyde Park Angels led the round; other investors include New World Ventures, IDEO, Amicus Capital, and the I2A Fund.

“With this funding, Food Genius is expanding the team in order to bring Food Genius Reports to market,” says founder & CEO Justin Massa. “Food Genius Reports is a leap forward for the food industry, providing intuitive and deep access to restaurant trends as they develop new products and craft marketing strategies.”

“Food Genius is direct evidence that Chicago has truly become a place where ideas evolve into viable businesses, creating jobs and economic growth in the City,” said Chicago’s Mayor Rahm Emanuel. “Entities like 1871 and Excelerate Labs play crucial roles in the development of these young companies, and I am pleased to see an environment developing that supports entrepreneurship and business expansion. I look forward to many more small businesses developing out of these facilities and programs and fueling Chicago’s economy in the coming years.”

“The food and restaurant industry is ripe for data disruption, and Food Genius offers astounding insights in this market where the consumers’ voice has been opaque,” says Guy Turner, managing director at Hyde Park Venture Partners. “We are excited to see them grow.”

The company is also announcing that Owen Shapiro of Leo J Shapiro & Associates and Hyde Park Angels as well as Brian Distelburger of Yext have joined Food Genius’ board of directors. Shapiro notes, “Food Genius brings a powerful combination of talent and tools to address the pressing need for better real time information on food sold through restaurants.  Starting with a firm grasp of ‘big data’ techniques and building with a unique set of data sources and tools, Food Genius is quickly positioning itself to be a primary source for insights that can drive innovation and profitability for foodservice and CPG companies that depend on restaurants directly for sales and insights into emerging trends.” According to Distelburger, “As the breadth, depth, and quality of local business data grows, there is an enormous opportunity to build new business intelligence services on top – Food Genius is leading this charge in the food vertical.”

Data Partnerships

In separate, key developments for the company, Food Genius is announcing data partnerships with CHD Expert and GrubHub.

A core element of Food Genius’ approach is to acquire, normalize, and extend massive amounts of menu item-level restaurant data. Food Genius is partnering with GrubHub, which will be the primary source of menu data. “GrubHub has the most comprehensive and highest quality database of restaurant menus,” says Massa. “We’re incredibly excited to work with not only the best data set around but also a company that regularly brings us lunch and dinner.”

Food Genius is also partnering with CHD Expert, a leading provider of data for foodservice sales and marketing strategies, to pair deep menu-level data points with detailed operator information. This new level of detail will provide foodservice sales teams with unparalleled insight into how specific locations use ingredients and preparation techniques.

About Food Genius  

Food Genius is big data for the food industry. By tracking more than 16.3 million restaurant menu items and how consumers interact with them, Food Genius leverages the social web to generate high quality and incredibly granular data for an array of commercial and consumer uses. They provide manufacturers, distributors, operators, and CPG brands with actionable data on consumer behavior and restaurant trends. Their signature product Food Genius Reports, a robust restaurant trends dashboard for the food industry, will launch in early winter 2013.

Food Genius is a graduate of Excelerate Labs (class of ‘11), was the first-ever Startup-in-Residence at IDEO’s Chicago studio, and was the first graduate of 1871. For more information, visit

About Hyde Park Angels

Hyde Park Angels (HPA)  is an organization that provides a forum for entrepreneurial-minded members to invest in seed and early stage businesses, primarily located in the Midwest. HPA is a group of current and former executives, entrepreneurs, and venture capitalists who are interested in investing their time and money into outstanding startups. HPA also provides domain expertise, strategic advice and coaching to its companies. The Chicago-based Hyde Park Angel Network was founded in 2006 by a group of classmates from the University of Chicago Booth School of Business Executive MBA Program. For more information, visit

About Hyde Park Venture Partners

Hyde Park Venture Partners (HPVP) is a venture capital fund investing in early stage technology companies in the Midwest, with particular focus in Chicago. HPVP invests in technology-enabled business and consumer services and healthcare IT companies raising their first or second round of institutional capital. HPVP draws on its strategic relationship with Hyde Park Angels (HPA) to provide industry and business expertise to its portfolio companies through a network of more than 90 seasoned business executives, entrepreneurs and service professionals. HPVP’s principals and the HPA network take an active role in mentoring and guiding portfolio companies in product development, business strategy, financing and exit through both formal director roles and informal mentorship relationships.

For more information, visit 

Filed under: Uncategorized — Tags: , — September 11, 2012

So… You Want to Understand Term Sheets?

As an entrepreneur, one of the most exciting moments you’ll have is being offered a term sheet. It can also be one of the most daunting if you aren’t sure what to look for. In this position, it is important to not only know what the terms mean, but also to understand how they work and which of them are most negotiable. Here’s a breakdown of some of the most critical parts of a term sheet.
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Filed under: Status Updates — Tags: , — August 3, 2012

Troy Henikoff’s Step-by-Step Approach to Financial Modeling

Excelerate programming in July is limited to what we like to call the “Entrepreneurs’ MBA.” During this time, we bring in experts in their respective fields to discuss all the topics that entrepreneurs need to know, but is knowledge they won’t get anywhere else.

To kick off this programming, our very own Troy Henikoff spoke to the teams on the process of creating a financial model. Troy’s motto of “what gets measured, gets done” is applicable to all aspects of a business, but is most apparent when applied to finances.
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Filed under: Status Updates — Tags: , — July 12, 2012

New funding sources emerge for Chicago-area tech startups

State of Illinois, group of industry leaders unveil separate investment initiatives

By Wailin Wong, Chicago Tribune reporterFebruary 1, 2012

The local technology sector gained two new sources of high-profile funding on Tuesday, with both the state of Illinois and a group of industry leaders unveiling investment initiatives for early-stage companies.

BuzzReferrals and Governor Quinn

Governor Quinn introducing Jordan from BuzzReferrals

The two announcements were unrelated but speak to the growing amount of entrepreneurial activity in the Chicago area. According to data collected by, an online community for members of the local startup scene, 124 digital startups were launched in the area in 2011, compared with 82 in 2010. Funding is also on the rise when measured by money raised and the number of companies attracting investment.

The state is joining an increasing pool of local investors eager to tap into young companies. On Tuesday, Gov. Pat Quinn announced a $575,000 investment in two local startups from the Invest Illinois Venture Fund, a new program that is, in turn, part of a $78 million initiative called Advantage Illinois. The recipients were Chicago-based Buzz Referrals, which helps companies use social media to reach friends of existing customers, and Evanston-based biopharmaceutical firm AuraSense Therapeutics.

The funding for Advantage Illinois, which seeks to help small businesses, came from an initiative within the federal Small Business Jobs Act signed into law in September 2010.

“They’re very young companies, and that’s why it’s so important for job creation,” Quinn said at a press conference.

The second investment announcement came from Matt Moog, chief executive of Viewpoints Network and the founder of Moog has launched the FireStarter Fund, a $5.7 million pool composed of contributions from more than 40 founders and CEOs of digital technology companies.

Brian Hand, co-founder of Timelines, is also a co-founder of the FireStarter Fund. Moog and Hand will manage the fund along with Troy Henikoff and Sam Yagan, the founders of Chicago-based incubator Excelerate Labs.

The investors involved in FireStarter are a veritable who’s who of the Chicago tech scene and include Morningstar CEO Joe Mansueto, venture capitalist J.B. Pritzker and Kevin Willer of the Chicagoland Entrepreneurial Center. The fund will make investments between $25,000 and $500,000, with the typical amount between $150,000 and $300,000.

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Filed under: Excelerate in the News — Tags: , , — February 1, 2012