What are the most effective ways for an entrepreneur to argue that a convertible note should be uncapped?
For a sophisticated investor, there are none, because an uncapped note just doesn’t make sense (see my answer to “If a startup’s valuation is $x, how much larger should its cap on a convertible note be?”)
For an unsophisticated investor (ie, friends and family) the only argument is that you’re both babes in the woods, and neither of you is legitimately able to determine a fair cap (aka a valuation) now. Therefore, by waiting for the next round with a professional investor to set the price, you will end up with a fair market value, and then give the investor a significant (say, 20%) discount to that value as a benefit of their early support.
*original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *
Written by David S. Rose
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