Convertible Note Agreement With Valuation Cap
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FAQ
A convertible note is legally a loan where the full amount (including interest) is applied to the purchase of stock at the next equity investment round. Unlike the current SAFE, the valuation cap on the convertible note is usually based on a pre-money valuation.
The valuation cap is a way to reward seed stage investors for taking on additional risk. The valuation cap sets the maximum price that your convertible security will convert into equity. To translate that into a share price, you divide the valuation cap by the series A valuation.
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.
How to determine your valuation capthe 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%),More items...?
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.