Convertible Note Agreement With Cap
Description
How to fill out Convertible Note Agreement?
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FAQ
A convertible note cap sets the maximum valuation at which the investment made via the convertible note can convert into equity. Investors in the convertible note typically get converted at the lesser of the valuation of the next qualified priced round and the cap.
A conversion price cap is used to determine the maximum price per share at which convertible notes or SAFEs convert into capital stock at the time of the financing resulting in the conversion, regardless of the valuation agreed to by the company and the new equity investors.
Because in most cases you won't know how many shares your convertible debt will convert into, most companies don't include convertible debt on their cap table. You should keep a ledger of issued notes (listing the holder of each note, the principal amount and the date of issuance).
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.
It is typically calculated by adding the amount of capital raised in a financing to the Pre-Money Valuation. It can also be calculated by multiplying the Post-Financing Fully Diluted Capitalization by the share price of the stock sold in the financing.