Many of the small "dot-com" companies got financing in the form of an instrument called convertible debt. This is like ordinary debt, in that it pays a regular interest amount. But debtholders have the right to convert it to equity.

Why do you think these companies chose this instrument? Do you think it was a good idea?

What do YOU think the answer is?

I think is a good idea in that, with convertible debt may provide companies a flexible funding choice that may alleviate or solve conflicting future financing problems. The problem would be figuring out why a company opted for convertible debt rather than a more standard securities such as straight debt or common equity.

Convertible debt often has a lower interest rate than normal debt because of the equity option, so that would be one reason.

Also, convertible debt would be used when getting normal debt is just too high of an interest rate or the equity portion is just too low.