We are first time entrepreneurs and have a pre-revenue tech startup. We’re currently raising our first round of funding (pre-seed you could call it), and we’ve received some decent interest. A VC wants to know what cap we are raising at. What does this mean and how would we know? Additional information: We have a prototype and we are not incorporated.
Hi, first off--congratulations on starting to get some VC interest. I've been through this process when raising for my own startup. I currently help founders at a global startup company-builder. I hope the following helps.
"Cap" is used to denote the maximum valuation you will use as ceiling in a convertible debt (CD) transaction. Don't let the name worry you, it isn't a loan that needs to be paid back. When raising money for a very early startup, there's no precedence for you to determine what valuation the startup commands. So, you'd rather defer that valuation decision to a point where you have more traction and you can be more scientific about how much your company is worth. In a CD arrangement, investors will commit to investing in your company for a "discount" on your next equity raise. If your next round is at a $2m valuation and you offered them a 20% discount, then -- when you raise your next equity round -- they'd receive shares at a $2m minus 20% valuation.
Happy to share more details on this, and help understand how to determine the right terms for your team. And address any questions you may have.
Answered 6 years ago
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