I’ve heard many entrepreneurs claim their startup to be worth $X million, based on the “valuation cap” [Note the bold, underlined, italicized text!] they received in a recent convertible note financing. Don’t make this mistake!
Take a minute to consider how the valuation cap works. In a typical convertible note, investors convert into shares of preferred stock at the lower of (1) a discount to the price paid by preferred stock investors (typically 20%), and (2) the valuation cap. So your valuation cap is really the HIGHEST price a noteholder can possibly pay upon conversion. If I say “the most I’d ever pay for your sh*tty car is $1,000,” your car isn’t suddenly worth $1,000. I simply don’t think it’s worth a penny more than that.
But who cares?! I promise I wouldn’t be wasting your time if it didn’t matter.