A debt option (that becomes equity) is the convertible note. Often, when getting investment from angels, it’s best to take their money in return for a note which converts to stock as soon as a significant funding event takes place with one or more venture capital firms.
The advantage of a convertible note is that it puts-off the need to determine a valuation of your company until later. When a VC decides to invest, the VC will decide on the valuation. The angel’s note then converts to stock at the same price as the VC gets. Since the angel is investing earlier than the VC, the angel is actually taking on more risk than the VC. Because of this, the convertible note often includes “warrants” giving angel the right to purchase additional shares. That basically provides a “kicker” for the angel, compensating the angel for taking on higher risk.
You can find an example of a convertible note on our Resources page, but it is for reference only, so you can see what one looks like. You’ll want your lawyer to draft one for your company.
Read more in the tag cloud links for convertible_debt.