Term Cap

A convertible note is a type of debt instrument that can be converted into equity at a later stage, usually during a future financing round. It is commonly used by early-stage startups to raise funds from investors.

The Term Cap sets a limit on the valuation at which the convertible note can convert into equity. If the valuation of the company in a future financing round exceeds the Term Cap, the conversion will be based on the Term Cap value. This means that the investor will convert their debt into equity at a lower valuation, potentially increasing their ownership percentage.

The Term Cap is important for investors as it provides a level of protection and ensures that their investment is not diluted significantly in case of a high valuation in the future financing round. It allows investors to secure a maximum conversion price, which can potentially result in higher returns if the company performs well.

Yes, the Term Cap can be negotiated between the company and the investor during the investment agreement process. Both parties may have different perspectives on the valuation and the potential growth of the company, which can impact the negotiation of the Term Cap.

While the Term Cap provides protection for investors, it can also limit the potential upside for the company and its founders. If the valuation of the company increases significantly in the future, the Term Cap may prevent investors from fully benefiting from the growth. It is important to strike a balance that is favorable for both investors and the company. ‍