Cap (on a convertible note)

A convertible note cap sets a maximum valuation at which the investment made via the convertible note can convert into equity. Investors in the convertible note typically get converted at the lesser of the valuation of the next qualified priced round and the cap. E.g., if an investor invests in a convertible note with a $10 million cap that is set to convert at the next qualified priced round, and the next round is at a $15 million pre-money valuation, the convertible note investors convert at a $10 million valuation. If, however, the next priced round values the company at $5 million, the convertible note investors will convert at $5 million even though the cap was $10 million.