Here’s Everything You Need To Know About Capped Notes

Here’s Everything You Need To Know About Capped Notes

Capped Notes

Capped notes set a maximum conversion price for investors in startups, ensuring they won’t pay more even if the startup’s value rises.

What Are Capped Notes?

Capped notes are a type of convertible notes that set a price for the conversion of capital into a startup’s shares. This cap acts as an upper limit, ensuring that the investor doesn’t pay more for shares than the specified cap price, even if the startup’s value increases.

What Is The Difference Between Capped And Uncapped Convertible Notes? 

The main difference between capped and uncapped convertible notes lies in how the price at which the investment converts into equity is determined:

  • Capped Convertible Note: It has a maximum price (the cap) at which the investment can convert into equity, ensuring the investor won’t pay more, even if the company’s value goes up.
  • Uncapped Convertible Note: This type doesn’t have a maximum price (cap), so the conversion price is usually based on the value determined in the next funding round.

What Is A Capped Return In The Startup Context?

In the context of startups and venture capital, capped returns could be provisions in an investment agreement or term sheet that cap or restrict the maximum return that an investor can receive. 

Such clauses are drafted to provide investors with a level of protection. Capped return clauses ensure that benefits from a startup’s success are up to a certain point. These allow individuals to participate in the upside potential of the company. 

Overall, capped returns are a negotiation point in investment agreements, and the specific terms can vary based on the dynamics between the startup and the investors.