What is a startup valuation cap?
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. The valuation cap sets the maximum price that your convertible security will convert into equity.
What is a valuation cap?
A “valuation cap” entitles note holders to convert the outstanding balance on the note into shares of stock at the lower of (i) the valuation cap or (ii) the price per share in a qualified financing (or, if there is a discount in the note, then the discounted price per share).
How do you determine valuation cap?
How to determine your valuation cap
- the 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\%),
Is valuation cap pre or post-money?
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.
Is it better to have a higher or lower valuation cap?
From an investor’s perspective, higher valuations reflect more expensive investments since investors must pay more for the same level of ownership. By investing at a lower valuation, convertible debtholders receive equity ownership at a cheaper rate than the current valuation.
What happens if the startup valuation is lower than the cap?
There’s some decent chance that the startup raises their future equity round at a valuation lower than the cap or just slightly higher than the cap, in which case the discount comes into play and the cap doesn’t. In fact, there’s even higher chances the startup never makes it to an equity round.
How does a valuation cap work?
How Does a Valuation Cap Work? A “valuation cap” entitles note holders to convert the outstanding balance on the note into shares of stock at the lower of (i) the valuation cap or (ii) the price per share in a qualified financing (or, if there is a discount in the note, then the discounted price per share).
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.
Should a startup’s cap be high or low?
The investor wants the cap to be as low as possible so that their investment converts to as much equity in the future as possible. Deep down inside most know the cap is in place to protect them, should the startup grow like a rocket ship with their investment.