A common question we get from entrepreneurs is whether we prefer debt or equity when making angel investments. The answer is: it depends! Convertible debt used to be the predominant method used to raise money from angels in the past, however today we are seeing a continuing trend towards angels (ourselves included) preferring equity (i.e. stock) over debt. Why? Well, while convertible debt tends to be easier to raise for the entrepreneur, many investors feel that they are investing "against themselves" with convertible notes. On the positive side, a convertible note is less expensive and quicker for the entrepreneur. However, on the negative side, angels feel that the entrepreneur is using their money to create more value so they can raise more money down the road at a higher valuation. Obviously this isn't the greatest for the angel investor, but you can compensate for this by offering some "sweeteners" to the early angels. Sweeteners include accrued interest, warrant coverage and/or a guaranteed discount when the debt converts to equity.
As for equity, the beauty of this is the valuation of the company is agreed to and set from the start. There is no question as to the cost/value of the shares being sold, both sides agree to it from the start. The issues to be mindful of here surround being sure to set a realistic valuation at a time when it is usually the most difficult. As an entrepreneur, you'd like to set the value as high as possible (to keep as much ownership of the company as possible), but not set it so high that either a.) the angels don't want to invest in the deal, or b.) the next investors (usually VC's by this time) who are more experienced in setting valuations decide the valuation of the angel round was too high, resulting in the next round being set at a lower valuation (a "down" round) and thus creating a big disappointment for your initial investors.
Whether you are offering a convertible note or stock, the important thing to keep in mind is what the expectation of the investor is for returns down the road. Investments made by angels in seed rounds are perhaps the riskiest investments out there, so be mindful that the investor will be expecting a very high level of potential return in exchange for investing at this very volatile stage!