What's uncapped convertible note?


Can someone explain the meaning of an "uncapped convertible note with an MFN clause"?


asked Oct 5 '13 at 06:32
19 points
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2 Answers


Convertible Note A convertible note is a vehicle for raising funding. It's a promissory note, but instead of being repaid as cash, the debt is converted into equity during your next priced round.

Valuation Cap - Uncapped The valuation cap puts a ceiling on the valuation at which the note converts to equity. If you raise at a $6mm valuation and an investor holds a note with a $3mm valuation cap, their equity is allocated as if the valuation were at $3mm.

Uncapped means that there is no valuation cap. The note will convert at the $6mm valuation.

MFN (Most Favored Nation) clause A most favored nation clause guarantees that investor the best terms - if you offer a second investor a better deal, the first investor gets upgraded to that deal as well.

All together: An uncapped convertible note with an MFN clause Putting it together, these notes are the most flexible terms you can possibly have.

  1. Convertible notes allow you to raise funding without expending effort on a priced round.
  2. Uncapped notes take away the concern of floating a valuation cap early on - naming a price is tricky, and you might not be ready to start declaring one yet.
  3. An MFN clause convinces the investor to agree to this uncapped note because they expect you to continue raising money, so when your terms do get established they are assured they will always have the best terms on your deal.
Source: I'm a cofounder at a YC startup that has raised money.
answered Oct 5 '13 at 07:14
Brad Koch
228 points
  • Wow, thank You for such a perfect answer! I didn't expect so explicit explanation! Thank You! – Asker 6 years ago


Having no cap could mean that the investor could get fewer shares when the note converts (compared to the number of shares that the investor could get with a cap).

I've never seen a convertible note without a cap.

answered Oct 6 '13 at 07:43
City Entrepreneur
42 points
  • [YC VC](http://ycombinator.com/ycvc.html) uses them. Casual and founder friendly investors at the beginning of the round may be amicable to them. You shouldn't expect to raise 100% uncapped. – Brad Koch 6 years ago

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