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Convertible Note + Cap

"Defers pricing conflict, creates hidden optionality"

Debt instrument that converts to equity at a future priced round, typically with a valuation cap that limits the conversion price.

How It Works

  1. 1

    Investor lends $100K as a note (not equity)

  2. 2

    Note has valuation cap of $4M and 20% discount

  3. 3

    Company later raises at $8M valuation

  4. 4

    Investor converts at lower of: cap ($4M) or discount ($6.4M)

  5. 5

    Investor gets $100K worth of shares at $4M valuation = 2.5%

Key Mechanics

Valuation cap sets maximum conversion price

Discount rate (typically 15-25%) provides additional benefit

Interest accrues and increases conversion shares

Maturity date creates pressure point

Regulatory Context

Debt instrument subject to securities laws. Accredited investor requirements apply. State usury laws may limit interest rates.