The notes have proliferated because they are quick and easy (no transaction costs, etc.) so it's the way many startups like to raise money. Priced rounds are fine too - they just tend to take more time and involve costs. YC and others have open-sourced streamlined equity financing documents, but so far, nothing has been as easy as raising on a convertible note.

clevy, I literally said in my comment I understand the advantages of notes. I don't need to be convinced. Notes are great.

My question is different - to what extent investors find note financing acceptable/appealing? Is it only YC companies that get the privilege? Is it a Silicon Valley thing, not used much elsewhere (like Seattle)? Is it used everywhere, and I just happened to be unlucky with it?

Sorry, DenisM. Investors in the Silicon Valley find notes very acceptable. It is not only YC companies that raise early money on notes, many other companies do too. Notes may be the most popular in SV, but I am sure that investors in other places use them as well. I think maybe you just got unlucky.

I can tell you the majority of angel investors in Dallas I've talked to that do not have experience with west coast deals do not like convertible notes.

We closed a note with Dallas investors that DID have experience w/ west coast deals that featured a cap and a discount.

Convertible notes are common across all companies raising early (seed) money, even ones outside YC. I don't know the landscape now, but the last time I was involved in raising money (2011 Q2), convertible notes were the presumptive default for that type of raise. Angel investors did not care at all and VCs sort-of cared, but the amount of money was so small for them that things like pro-rata participation rights were vastly more important.