As in the example in this video, if we were raising $1m we may set the Valuation Cap at $10m. That means no matter what, even if our Valuation goes to $50m for the next investor, the current investors will convert at a $10m valuation, not a $50m valuation.
That does imply a $10m valuation, but only if our next round of investment is at least $10m, and maybe higher, which Investors would want it to be because that implies the value of their investment has also gone up!
These structures have become increasingly common among Pre-Seed and Seed-Stage funding rounds because settling on valuations in the early stages is often difficult for Founders and Investors to do.
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