He's an example of where having many notes can hurt founders:
- Raise $2m at an $8m cap, 15% discount.
- Raise $2m at an $18m cap, 15% discount.
- Raise $2m at a $28m cap, 15% discount.
- Sell 20% of company for $X in the Series A.
Caps are "sort of" like pre-money valuations, so the founder might expect that their dilution from the 3 notes is approximately 2/10 + 2/20 + 2/30 = 36.7%
Here's what actually happens in 4 different scenarios:
1) Raise $10m at a $40m pre. Dilution from the notes is 20.0 + 8.9 + 5.7 = 34.6%
2) Raise $7.5m at a $30m pre. Dilution from the notes is 20.0 + 8.9 + 6.3 = 35.2%
3) Raise $5.0m at a $20m pre. Dilution from the notes is 20.0 + 9.4 + 9.4 = 38.8%
4) Raise $4.0m at a $16m pre. Dilution from the notes is 20.0 + 11.8 + 11.8 = 43.6%
For the founder, #1 and #2 are better than expected, #3 and #4 are worse. It's not hard to get into situation #3 or #4 if you raise money from strategic investors or angels at high caps, and then Series A investors drive your price down below your most recent caps because that's where the market is. The 9% dilution difference between the first and last scenarios is fairly dramatic. When you combine that with the 20% dilution from the Series A, it's the difference between founders and employees having ~45% of the company vs ~36% of the company.
(Source of calculations: https://captable.io/company/8/convertible-notes/calculator)