What is a typical valuation cap?

The Valuation Cap is the most important term of a convertible note or a SAFE. Typical Valuation Caps for early stage startups currently range from $2 million to $20 million. The valuation cap is a way to reward seed stage investors for taking on additional risk.

What is cap on convertible note?

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.

What is safe 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.

Do you need a PPM for a convertible note?

A PPM is not required for every capital raise. While Rule 506 of Reg D and the antifraud provisions of the federal securities laws mandate that issuers disclose truthful and accurate information to investors, there is no requirement to provide any specific information or disclosures to accredited investors.

How does a convertible note convert?

Generally, convertible notes convert into shares (the “Conversion Shares”) at a qualified equity financing round (this term should be defined in the note and usually means a preferred financing round of a minimum size) at the lower of two different prices per share: (1) the price per share using the conversion cap ( …

Why is there a $4m cap in the convertible note?

“We put the $4M cap in the convertible note to protect our early investors in the event their investment allows us to skyrocket and raise an equity round in the future at a high valuation. But remember that with your 20\% discount, a $4M valuation in the future would allow you to convert into equity at a $3.2M valuation.

How do investors get converted from convertible notes?

Investors of a convertible note usually get converted at the lesser of the valuation of the next qualified funding round and the cap. For example, if the convertible note cap is $5 million and that note is set to convert at the next funding round that values the company at $7 million, the convertible note will convert at the $5 million valuation.

What is a convertible debt cap?

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. Convertible notes are a type of short-term debt that can be converted, upon later financing, into equity shares of the company that issued them.

When do investors take advantage of the cap on notes?

In this case, the investor only gets to take advantage of the cap if the company raises their future equity round at a valuation higher than $5M (20\% discount off $5M = $4M). So any valuation lower than $5M gives the investor exactly the same equity as if the note didn’t have a cap at all.