Some background: This is my first time taking money for my startup, so I ran it by my "silicon valley advisor" (a buddy from college who runs a notable tech startup in SV). I asked him what he thought of the terms, and he said that they are the most entrepreneur-unfriendly terms he has ever seen. His main concern was how low the cap was set at. He said I should insist on a $4M cap, and not accept anything under $2M.

My dilemma though, is we're currently pre-revenue; and I need this cash injection to propel my startup through our launch.

Isn't the cap on a convertible note akin to a pre-money company valuation? If so, I honestly agree with the investor that we are only worth ~$500K. I mean, we're pre-revenue, so $500K is optimistic IMHO.

Personally, I have a proven track record of building and exiting companies. Nothing huge; my last business was acquired for $250,000 last year.

I'm confident that I can make this business successful; but I don't want to screw myself over by taking this cash now, when in a year or so I may be seeking Series-A financing from a large VC; and don't want to turn them off by having accepted such poor seed investment terms.

Couple questions:

1) Do you feel like $120K with $500K cap, and 25% discount is really that bad of a deal?

2) If I take this deal as-is, do you anticipate backlash from future investors?

3) Where do I have negotiating leverage? Should I tell him I want a $2M cap but am willing to increase the discount to 30%? Should I offer to pay interest on the note?

4) I realize posting to HN is no substitute for bonafide legal counsel; so is there someone you would refer me to?

Thanks everyone.