Early-stage investment frequently uses instruments that convert into equity at a later priced round rather than fixing a valuation now.

Convertible notes. Debt with a maturity date and interest, converting into the next qualifying equity financing. Because they are debt, maturity without a financing creates a repayment obligation the company usually cannot meet, which is why extensions are routine.

Simple agreements for equity are not debt, have no maturity and no interest, and convert on defined events.

Valuation cap. A ceiling on the valuation at which the instrument converts, giving the early investor a better price if the round prices above the cap.

Discount. A percentage reduction to the round price. Where both apply, instruments usually specify the more favorable to the investor.

Pre-money versus post-money caps. A post-money cap fixes the investor’s percentage and pushes dilution from other instruments onto the founders. The difference is frequently not appreciated until the round is modelled.

Qualifying financing threshold, below which conversion does not occur automatically.

Change of control treatment: a multiple of the investment, or conversion at the cap, at the investor’s election.

Stacking. Multiple instruments at different caps require a full model before the priced round, not after.