What is Valuation Cap and Valuation Floor?

The valuation cap sets the maximum possible valuation at which the convertible security derives its conversion price. Valuation cap applies regardless of how much higher the actual valuation of the financing round is above the cap.
Valuation cap serves to protect early investors of the convertible security. It is intended to compensate these early convertible investors for the risk they are taking by investing in the firm in its earlier stages to help bring it to the higher “qualified” financing’s valuation.

Essentially under a scenario where the valuation exceeds the cap, convertible investors will receive more shares than the investors of the “qualified” financing round who contributed the same amount of money.

Inversely of a valuation cap, a valuation floor sets the minimum possible valuation at which the convertible security derives its conversion price. Valuation floor applies regardless of how much lower the actual valuation of the financing round is below the floor.

Valuation floor serves to protect the founders, ensuring that the new financing round share price is set at a preset minimum value. In the event of an extreme down round, it prevents founders from getting excessively diluted by the convertible investors due to an extremely small conversion price.

About Qapita

Qapita Fintech Pte Ltd (Qapita) is a fintech and legal-tech start-up. Qapita started with digital equity management software for private companies, particularly start-ups. Its software platform is designed to enable capitalization table management, employee stock ownership plan (ESOP) management.

Qapita is building more software products to provide solutions to companies as well as its investors, shareholders and employees. Qapita’s vision is to build a network of stakeholders in the private markets and digitally enable the private capital market transactions on its platform.

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