Valuation Caps preferred Investment Instrument for Startup Investors
For startups, seed funding is a daunting task to realize their vision and market penetration with innovations. Venture Capitalists (VC) firms take a call for providing funding to a startup company based on several factors and valuation caps is one of them. Founders often believe that the valuation cap sets the floor for the next equity round. Going by the evidence of seed funding in Canada, Ontario , it is to be a necessary foul for startups while raising seed capital. The investors admit that a valuation cap often acts more like an anchor and holds back value realization. Valuation Caps and Startups Venture capital firms take a lot of risk by investing in very early-stage companies. Convertible noteholders with a valuation cap can convert their outstanding amount into stock at the lower or the price per share in qualified financing- the first round of equity financing. Any convertible debt, convertible preferred stock, or another equity-linked derivat...