What is a Valuation Cap: Video

Example of a Valuation Cap

Let’s say an investor invests in your company. They invest $1MM into the company via a convertible note that has a $10MM valuation cap. The capitalization table of the company is simple -- it has 10MM of common shares today held by two founders. Later, the company raises a Series SEED round of $3MM at a $15MM pre-money valuation. Without a valuation cap, the monies from the convertible note will buy in directly alongside the SEED money at $1.50 per share (=$15MM pre-money valuation / 10MM shares outstanding). This is illustrated in the middle cap table below. However, with the valuation cap, the noteholders will be able to buy in at $1.00 per share (=$10MM valuation cap / 10MM shares outstanding), which is illustrated in the right cap table below. Thus, with the valuation cap, the noteholders buy 1MM shares (assuming no interest), whereas without the cap they would only buy 666,667 shares.