Wow great post - good luck finding the right person. If I was 10 years younger and no wife I'd be moving right in with you guys. Sounds like the perfect startup culture
It means if another future investor makes an investment where the pre-money valuation of the company is LESS THAN $4MM (like, $350K for 10%), then the initial investor's shares would convert at 1.25x the rate of the new money coming in. So new investor would get 10% for $350K while past investor's convertible note would convert to 12.5%.
I've got a team of 8 full time people (half are salaried and half are only commission). We're hemorrhaging cash as we roll out our marketing plan. Plus we have features on our site like "Refer a friend, earn $10 when their first order ships." That money has to come from somewhere.
My only other option is to get as many personally-guaranteed credit cards as I can and just use them instead of taking on an investor. But this seems more high-risk.