The cap on a convertible note sets a maximum valuation amount at which an investment made can convert into equity. Typically investors get the lesser of the next qualified pricing round.
As an example: If the cap on a convertible note is $7 million and the next round is priced at a pre-money valuation of $10 million, the convertible note will convert into equity at $7 million. If the cap on the convertible note is $7 million and the next round is priced at $5 million, the convertible note will convert at $5 million.
Discount (On a Convertible Note)
A discount on a note sets a percentage reduction at which the convertible note will convert relative to the next qualified priced round. Effectively this permits an investor to convert the principal amount of their loan (plus any accrued interest) into shares of stock at a discount to the purchase price paid by investors in that round. Discounts range from 0% to as high as 35%, with 20% being common.
Interest (In a Convertible Note)
A convertible note acts as a loan from an investor to a startup company until the note converts to equity at a later date. There is an interest rate on the loan which is paid back at the end of the specified loan period. The loan amount plus the accrued interest will convert into equity when the company is valuated.
Pro-Rata Investment Rights
Pro-Rata investment rights give investors the right to participate in the subsequent funding round to retain their original ownership percentage in the company and avoid equity dilution.
SEC (Securities and Exchange Commission)
The Securities and Exchange Commission is the governing body responsible for creating and enforcing securities laws in the United States of America.
A subscription agreement is a document that is included in subscription agreement packages and is an application that an investor fills out to join an investment partnership or fund. The terms of the investment such as price and timing of the investment are outlined in the subscription agreement and are agreed upon between the buyer (investor) and seller (issuer / fund).
Venture Capital Firm
Also known as a VC firm, a Venture Capital Firm is comprised of a group of Limited Partners (investors) who pool money together to invest into private companies. The limited partners (LPs) are represented byb the General Partner (GP), who makes the investment decisions, represents the interest of the LPs, and manages the fund.