Tariq Aris
Jul 21, 2017 · 1 min read

Hi Mark, Thanks for all the knowledge and material that you continuously share.

What’s your view in terms of setting the level of the cap on a convertible note? I am aware that one of the reasons a convertible is attractive is because it ‘defers’ the need to set a valuation at the point of investment, but let’s say…

Company A is raising a convertible because it’s ‘easier’ and it’s the desired structure by the investor (accelerator). Both investor and company agree that fair value for the company is $6m (Yet the investor still wishes to invest via a note, which has a 20% standard discount), where should the cap be set?

The point is, should it be set at the current market value ($6m) or should it take into account other factors in play and be priced higher? (perhaps $6m + 20%)?

In my view, the cap should be used as protection but not be used to set the price, since the investor may still benefit from a lower valuation in the next round, but I am happy to be proven wrong :)

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