why do venture capitalist prefer convertible preferred stock over convertible bonds?
Most investments are in young companies that could not support debt financing due to volitile cash flow generation. No one investing in risky early stage companies would invest or lend with out getting some upside in the form of equity.
So I guess that means that for a new and growing company, the option not to pay dividends is good for value, since the option not to pay interest would lead to default and do all sorts of bad things to its credit rating and chances of continuing to grow.
Option not to pay dividends is good for growing company. Debt does not afford the option to for go interest unless it has PIK option. If company is more mature, debt is a possibility, but no lender is going to lend (except for revolvers) when the incestment risksuggests an equity like return is justified unless they are given some type of guarantee. Issuing preferred shares is just a way of establishing some type of priority in the capital structure and gives the company more flexibility to operate compared to debt.
thanks guys. very helpful.