Valuation Caps in crypto equity or token fundraising refer to a pre-agreed maximum valuation at which future equity or tokens will convert from an investor’s initial capital. This mechanism, typically found in convertible notes or SAFEs (Simple Agreements for Future Equity), protects early investors by setting an upper limit on the price per share or token in a subsequent funding round.
Mechanism
When a future equity or token funding round occurs, the investor’s initial capital converts at either the valuation cap or a discount to the new round’s valuation, whichever yields a lower price per share or token for the investor. This conversion logic is typically embedded in the legal agreement and can be programmatically represented within token issuance smart contracts.
Methodology
The methodology involves clearly stipulating the valuation cap within investment agreements, defining the triggering events for conversion (e.g., next equity round, token generation event), and specifying the precise calculation mechanics. For token projects, this requires careful smart contract design to ensure the programmatic conversion adheres precisely to the agreed terms, managing investor expectations and potential dilution.
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