From Business Insider: "Here's the deal: A convertible debt is a type of financing that has three distinct characteristics: It doesn't give the investor any legal authority in the company, thereby reducing legal fees associated with the investment (from near $40k to just $5k), and it defers valuation to the next round. In return for the risk the investors incur, they are offered a significantly upgraded rate when investing in future rounds of financing. A capped convertible debt essentially sets boundaries for that significantly upgraded rate, while still avoiding negotiations on an (often premature) evaluation of the seed or early-stage company. That cap helps avoid the conflicts of interests that arise between a VC and a company in the eventual valuation of a company. Meanwhile standard equity financing sets strict parameters on the companies valuation, gives investors legal sway with the direction of the company, and has legal fees that can reach $40k.
Read more: http://www.businessinsider.com/whats-all-this-noise-about-co...