Convertible Note Cap
Content
Definition
Convertible Note Cap is a provision in a convertible note that sets a maximum valuation at which the note will convert into equity, protecting investors from dilution in subsequent financing rounds.
Usage and Context
Convertible note caps are used in early-stage investments. They limit how much the company can be valued at when the note turns into equity. This helps investors by not lowering their share value later.
Frequently asked questions
- What does a cap on a convertible note mean? A cap on a convertible note sets the highest company value for converting the note to equity. It protects investors from getting less ownership if the company`s value rises a lot.
- How do convertible notes convert into equity? Convertible notes turn into equity during a later funding round or a specific event. The cap influences at what company value this conversion happens, affecting how much equity investors get.
- Is a convertible note cap pre or post money? A convertible note cap is generally pre-money. It`s based on the company`s value before new funding is added. This decides the equity investors receive when notes convert.
Benefits
Convertible note caps protect investors from owning less of the company if its value goes up a lot. It offers a fair way to turn debt into equity.
Conclusion
Convertible note caps offer a safeguard for early investors. They ensure investors get a fair amount of equity, even if the startup`s value increases significantly.
