I understand what a debt is, so how is "no cap and no discount debt" different from a regular debt?
Also why would you as a startup would want to take a debt?
Another question - what's the point of Yuri giving the debt, it seems he's not even asking for equity in return?
The risk for the convertible debt investor is that this valuation will be very high and the series A can take a long time.
To limit this risk convertible debt investors negotiate valuation caps and discounts.
Cap: The convertible debt gets converted at min=[series A valuation, cap]. Discount: The convertible debt gets converted at series A valuation * (1- discount)
(Obviously, when both cap and discount apply, the valuation for conversion becomes min = [series A valuation * (1 - discount), cap].)
Not sure if it's possible to get $300k on $20k/month revenue, though.
Basically you need a small-scale VC or large-scale angel investment... or else to continue to bootstrap.
If you don't do a series A the valuation of the sale of the company will be taken. A sale without investments in between would mean a debt investor only gets his money back + interest.
Given your situation, the debt investor might negotiate a time limit for the conversion (and either a cap or a formula for the valuation at that point).
You'll likely need to part with 10-20% equity in the business, but the value of the $300k to take you to the next level should make sense. Think of it as - can we get to $200k/m by 2012 if we have $300k/$600k/$1mm. If you can 10x your revenue in a year and give up 20%, you're in a good place.
Email me, and I'd be happy to discuss your situation and provide pointers where I can. (address is in profile)
So if someone else invests $250,000 for 25%, that's a valuation of $1m. Yuri would get 15% at that valuation. He'd get 7.5% at a $2m valuation and so forth.
Obviously any exit event would be a valuation and Yuri would get a cut. But in case of failure, everyone walks away empty-handed.