Excellent piece from a highly informed source but I think the negative economic effects of the bridge note are highly exaggerated by the use of artificial examples (how many Series A rounds have you heard of that go for $50M at $100M valuations?).
In practice, bridge investors who put up $500K will typically get their 10% or so of the company when the $4M-$5M Series A round is done and they will then tend to benefit as indicated in the second example given in this piece when the larger B round comes.
I don't disagree that the economics of bridge notes clearly favor the company. I just don't think it is as extreme as here indicated and, for this reason, such notes tend to be widely used in the startup world (they do have their clear advantages as well - some of which are discussed here: http://news.ycombinator.com/item?id=761767).
As an angel investor, I despise convertible notes. Mostly for the same reasons. I am taking my bet now, so I would like to invest at the valuation now, too. I suppose this is mainly just the perception of risk after the check has been written. So caps are necessary, if they are reasonable (I just imagine that that is the price at which I am buying the equity.)
Things I've seen that also bother me: Notes with embedded Preferred terms, in case there is no conversion event (now I have to negotiate preferred terms; the point was to avoid doing this now) and notes that allow early repayment without recourse (you buy out some early investors before a funding round.)
Many of the companies I represent face this same resistance to such notes from early-stage investors, and for the reasons you note, and in such cases I tell them just to do a Series AA if they want to keep it simple while still accommodating investor concerns.
In practice, bridge investors who put up $500K will typically get their 10% or so of the company when the $4M-$5M Series A round is done and they will then tend to benefit as indicated in the second example given in this piece when the larger B round comes.
I don't disagree that the economics of bridge notes clearly favor the company. I just don't think it is as extreme as here indicated and, for this reason, such notes tend to be widely used in the startup world (they do have their clear advantages as well - some of which are discussed here: http://news.ycombinator.com/item?id=761767).