Fundraising Jargon 04: Capped Notes vs. Uncapped Notes

As discussed before, convertible notes delay placing a valuation on a company until a later funding round, but investors often still want a say in the future valuation of the company, so that their stake does not get diluted down the line. When entrepreneurs and investors agree to a “capped” round, this means that they place a ceiling on the valuation at which investors’ notes convert to equity. So, if a company raises INR 1Cr in convertible notes at an INR 10Cr cap, those investors will own at least 10% of the company after the Series A round (INR 1Cr/INR 10Cr).

An uncapped round means that the investors get no guarantee of how much equity their convertible debt investments will purchase, making these kinds of investments most favorable for the entrepreneur. As taken as an example previously, let us consider now that a company raises INR 1Cr in an uncapped round. If the entrepreneur ends up convincing the investors at round Series A to agree to an INR 20Cr investment, it will mean that the convertible note investors are left with just 5% of the company, half of what they would get if they capped the round at INR 10Cr.