[patio11]

They are analogous but not equivalent. A cap of $5 million is a strictly better deal than a valuation of $5 million from the investor's perspective, because if the startup underperforms their next valuation will be below the cap (investor gets more of the company than a $5 million valuation would imply) and if the startup outperforms their valuation will be above the cap (and the investor gets shares worth more than their slice of $5 million would imply). This makes it much easier to pick higher dollar amounts with less kvetching, which is in startup's interests.

Also, just as a social norms thing, the "round" structure forces contemporaneous investors to get the dame deal regardless of value add (and you have to herd cats to make it happen) but you can close convertible notes individually at heterogenous terms. This helps break deadlocks.

See pg's article on Higher Resolution Fundraising.

[motti_s]

Thanks Patrick.

I'm familiar with pg's essay about High Resolution Fundraising, but as stated in the essay, this can happen even without the use of convertible notes: "You may not need to use convertible notes to do it."

Is it a fact that it's much easier to get a higher dollar amount with a note deal compared to shares? When issuing the investor shares with an anti-dilution clause doesn't it have the same effect as a cap, so the investor is protected from a down round? Wouldn't this ultimately allow the investor to agree to the same dollar amount as in a cap?

[loceng]

So negotiate strongly on the cap - don't undersell yourself.