Glossary

Term Cap

Definition

The term "Term Cap" refers to the maximum valuation at which a convertible note or other security can convert into equity in a future financing round. It is an important concept in investment agreements and plays a significant role in determining the potential returns for investors.

What is a convertible note?

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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.

How does a Term Cap affect the conversion of a convertible note?

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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.

Why is the Term Cap important for investors?

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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.

Can the Term Cap be negotiated?

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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.

Are there any drawbacks to having a Term Cap?

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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. ‍

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