Minibonds are typically 3 to 5-year bonds that are raised from "the crowd" through crowdfunding platforms, allowing companies to bypass the City and go directly to private investors. Investors typically lend money at a rate anywhere upwards of 4%.
Established companies like John Lewis have used minibonds as a way to raise cash in the past, but the method is increasingly popular with high-risk startups, thanks to the rise of crowdfunding platforms that make it easier to do.
Mexican chain Chilango last year raised £1 million ($1.5 million) in a "Burrito bond" offering on Crowdcube, craft beer maker BrewDog funded part of its latest £25 million ($37.8 million) "Equity for Punks" crowdfunding through a minibond, and east London coffee chain Shoreditch Grind also turned to a minibond to raise £1.5 million ($2.2 million) earlier this year.
But Lynn told Business Insider at Fintech Connect conference in London this week: "I'm particularly concerned about minibonds because I really think investors are not properly evaluating risk versus returns. The problem with venture debt is that you get all the downside and none of the upside."
Lynn thinks the promise of relatively high returns in an era of record low interest rates is blinding people to just how risky it is to lend money to a startup. What's more, for the risk they're taking the returns aren't that great even if it does work out.
He says: "The problem is, if it doesn't work out the bondholders are going to get zero. But if it does work out, all they're going to get is their principle back and a bit of a coupon. I guess philosophically in this space it's important for people to be compensated for risk with some upside."
"In the case of a Chilango, it's established, it's doing well I'm sure - but it's still an early stage business, it's still a long way from being a massive success."
City regulator the Financial Conduct Authority warned at the start of the year that: "Minibonds are illiquid and can be high-risk, as the failure rate of small businesses is high."
Not only is there a greater risk of failure, in many cases these investors have even less protection than if they bought a regular bond. Reuters pointed out last year that Chilango's first "Burrito bond" carried "none of the protection professional investors demand when lending to junk-rated companies" and was supported by a "flimsy document [that] provides limited financial information."
Seedrs
Seedrs cofounder and CEO Jeff Lynn.
"I think that the impression is being created that they're safer than they are. When people think about debt, think about making a loan to somebody, the instinctive reaction is that this is going to be a pretty safe bet."
But he added: "The notion of affinity investing - the notion of giving people the chance to invest in things they like and care about and want to be a part of - is not in itself a bad thing.
"To the extent that people are backing Chilango's Burrito bond because they like their burritos, that's not in and of itself a bad thing. Where I get concerned are where the economic terms are so far out of whack with the economic risks."
Seedrs only lets people buy equity in startups, which Lynn says he feels gives people adequate upside as there stand to make more money if the company does well. Seedrs also clearly states all the risks involved.
Lynn says: "We've stayed away from minibonds and debt instruments generally on the basis that we think it makes much more sense for investors to have full upside. I worry with the minibonds that the long-term returns are going to be disappointing."