Can my convertible cap be a signal to the next round’s valuation?

November 22, 2022 10:57 am

We launch new series of 1-minute videos – tips for startup founders from Alexander Konoplyasty, co-founder of Flashpoint Venture Capital.

❓”Can my convertible cap be a signal to the next round’s valuation?”
👉Your conversion cap could be a signal to the next round’s valuation but there are many considerations why not

A lot of times you do not want to do a priced round and raising a convertible loan makes more sense. A convertible has a number of features, including the conversion price that could be capped or uncapped.

I get asked often whether a conversion cap could have signaling effects on your next round?

On one hand, yes, there is some signaling that current investors agree to a valuation level. Yes, the higher cap could be played as a good negotiating card vs VCs to push the price, especially if the convertible was mostly provided by outside investors.

On the other hand, incoming next-round investors would still look at company performance regardless of caps or other pricing indicators.

Try making your round competitive, by going out to more relevant investors, hence past caps would be less relevant. If the round is happening sometime after the convertible, then also less relevance, since many things might change and variables are different.

And of course, if the company is struggling to raise in general, this won’t be your main issue to solve.

In summary, conversion cap could be a signal to the next round’s valuation but there are many considerations why not. Please like and share this post if it was relevant and contact us if your company is looking for capital. Submit your pitch today!