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WE ARE NOT LAWYERS. ALL CONTENT IS PROVIDED FOR GENERAL INFORMATION PURPOSES ONLY. Nothing here is intended to be legal advice in any way.

This list is not comprehensive, but for founders who have no experience with raising money, we wanted to list out some of the first metrics you may want to pay attention to.

You should hire a lawyer to help with the specifics of your case.

Value Cap

The value cap is sometimes treated, at least at a high level, as a valuation — but it is not (A cap is not a valuation). Generally, we think of the cap as a limit on dilution on the investment. It says the Convertible Note will convert into no less than X% of the company before you raise additional capital.

If an investor thinks there is a good chance a company will raise a qualifying round above the Value Cap, then the dilution limit set by the Cap is one way to “pay” the investor for his/her investment.

You can see details of other companies funding on AngelList, but be honest about where your company is when choosing an appropriate Value Cap. Just because your Friends and Family investors may not be sticklers on the terms, doesn’t mean you should rip them off. Here’s another interesting, albeit dated, article.

Discount

Assuming the dilution limit (Value Cap) does not come into play, the investors can also be rewarded for their investment through a discount on conversion. This basically says: “because you put in money before the Qualifying Investment, you can have those same shares at for a cheaper price”. There can be some variation on the discount, but we think a range of 15-20% is not uncommon. This discount should be determined on a case by case basis, and with consideration of the other financing terms.

Interest Rate

Before converting, a Convertible Note acts much like a typical loan. Interest accrues between the time of issuance and conversion (or maturation). At a qualifying event, the entire principal plus accrued interest is converted.

What else?

You will also need to determine additional variables such as the duration of the loan, how long and how much you may raise under the issuance, and what qualifies as a Qualified Financing.

This list is not comprehensive, but for founders who have no experience with raising money, we wanted to list out some of the first metrics you may want to pay attention to.

You should hire a lawyer to help with the specifics of your case.

WE ARE NOT LAWYERS. ALL CONTENT IS PROVIDED FOR GENERAL INFORMATION PURPOSES ONLY. Nothing here is intended to be legal advice in any way.