Should a convertible note be the prize?

We have nothing against convertible notes. In fact, it may not be long before Bizplancompetitions.com seeks out an angel investor to help finance growth at our company, and a convertible note may very well be the financing instrument we end up with.

But we question whether a convertible note—defined as an interest-bearing loan that converts to equity under prescribed conditions—is an appropriate “grand prize” for a business plan competition.

The topic came up last week in connection with Lora Kolodny’s column in NYTimes.com titled “Why Virtual Nerd Declined a $70,000 Competition Prize.” Ms. Kolodny chronicled the decision of a start-up company to reject the grand prize—a $70,000 convertible note—in the 2008-09 Olin Cup competition at Washington University in St. Louis.

There are some obvious reasons why a CASH grant is preferable to a convertible note as a competition prize:

  • rapid deployment of the cash to grow the company
  • no strings (or at least not many) attached
  • no repayment requirements, interest costs, or potential equity dilution
  • no negotiations, delays, or legal fees

There may be some less obvious problems with convertible notes as well. For example, won’t the “winner” feel pressured to accept the terms of the note when in fact a better deal may be procured elsewhere (think “Shark Tank”)? And can it happen that a team wins the competition but then falters in the due diligence process required to actually receive the funding? And what about the responsibility to award these funds, whether public moneys or private investment: should that responsibility be transferred to a group of independent judges who, no matter how distinguished and capable they may be, are able to walk away after the competition with little or no responsibility for what happens to the investment?

If it’s not an independent group of judges making the decision … well, again, isn’t that a little like Shark Tank?

Presumably, the reason there continues to be a significant number of competitions offering a convertible note as their grand prizes is that the dollar amounts are typically much larger, and therefore more impressive and meaningful. While it may be difficult for most competition organizers to fundraise for a substantial cash prize, it can be easier to seek out an investor to offer a note prize.

And regardless of what we say here, business plan competitions offering convertible notes or other types of investment as prizes seem to be having no problem attracting entries. New York’s $200K Creative Core Emerging Business Competition, for example, recently announced a record 103 entries for its 2010 competition that awards the winner with a $200,000 convertible note. Other prestigious competitions are experiencing similar high levels of interest.

But the fact is that you do not have to win a competition to win seed capital. One of the great benefits for participants in a business plan competition is that they will have the opportunity to gain the attention of investors who may be judging, sponsoring, or simply attending the event. Convertible notes and other seed investments are oftentimes the result.

As a business plan competitor, would you prefer to see a cash prize? Please feel free to comment.

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Joe Hurley is a CPA, author of "The Best Way to Save for College - A Complete Guide to 529 Plans", founder of Savingforcollege.com, and co-founder of Bizplancompetitions.com. He has also recently started making maple syrup.
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