How to determine your valuation cap the amount you're raising on the convertible note (say $500k), the conversion discount of the note (say 20%), the pre-money valuation cap of the note (say $4m), the percentage of your company which the VCs will take in your Series A (say 30%),

A valuation cap is used in a convertible note to give the noteholders a “ceiling” value at which their investment will convert and, in turn, that gives them a “floor” in regard to their ownership.

A convertible debt cap, also known as a valuation cap, is the maximum amount at which an investor will change his or her investment into equity.

Although it is customary to forego a term sheet, in some cases it may be required if the parties need to negotiate certain terms. It can be advantageous to use a term sheet for the company to easily summarize the terms of the notes for potential other investors purchasing a convertible note.

Valuation Cap: In addition to the conversion discount, convertible notes also typically have a valuation cap, which is a hard cap on the conversion price for noteholders regardless of the price per share on the next round of equity financing.

A convertible note is a short-term debt agreement that converts into equity at a future date. Usually, this happens when one of these events takes place: The company raises enough capital to reach a pre-determined benchmark. The term of the loan expires.

A term sheet for a convertible note is a non-binding agreement among startups and investors. We use it during a funding round; and it sets the ground for the legally binding documents that will follow, once both parties have come to an agreement.