Are valuation caps pre or post?

A valuation cap is pre-money: the ‘cap’ or limit is placed on the starting valuation of the company before the financing round. This process protects investors against dilution should the starting valuation of the company increase significantly between funding.

Does a SAFE have a valuation cap?

Another term that can come with a SAFE is called a Valuation Cap. This is another way for the SAFE investor to get a better price per share than a later investor. If your company ends up raising money at a valuation above the “cap,” then the SAFE investor gets to convert at a share price equivalent to the cap.

How do you justify a valuation?

You can also justify your valuation by using the earnings multiple approach. It’s quite simple. All you need to do is to multiply your total earnings without including any deductions such as tax and depreciation by some multiple.

How do you measure the cap on a convertible note?

How to determine your valuation cap

1. the amount you’re raising on the convertible note (say $500k),
2. the conversion discount of the note (say 20\%),
3. the pre-money valuation cap of the note (say $4m),
4. the percentage of your company which the VCs will take in your Series A (say 30\%),

How does a convertible note with a cap work?

A convertible note is a combination of debt and equity that helps a startup raise needed capital while still being able to delay valuing the company. The note converts into equity in that round on the same terms as the new investors, but at a discount to reward the risk the note holder took by being an early investor.

Do you pay interest on a convertible note?

4) The Interest Rate on a Note – A convertible note is a form of debt, or loan. As such, it usually accumulates interest, usually between 4-8\% between the point when you sign it and when it converts.

Should I use a convertible note with a cap?

Don’t use convertibles. As one of the main “points” of doing a convertible note was to not fix a valuation in the first place, and with a cap you basically have set a valuation, go with a “Series Seed” equity deal instead.

What does the discount mean on a convertible note?

The discount means the future valuation can be higher than the cap and the investor will still convert at a valuation that’s lower than the cap . Let’s look at a convertible note example with a $4M cap and a 20\% discount.

How does the Foursquare convertible note valuation cap work?

The effect of the cap is that the convertible note investors are guaranteed a certain share of the company, even if you get a Foursquare valuation. That minimum share is: (1 – [series A investor ownership] ) * [amount raised on conv note] / [valuation cap].

How many ways can you calculate convertible note conversion math?

You’ve raised a convertible note and now you are hitting series-A. Time for those notes to become equity. Now convertible note conversion math is tricky at the best of times, but what you don’t know is there are in fact three ways that conversion can be calculated! Huh? That’s right 3!