Participation Rights



Updated September 15, 2023
Raising Venture Capital

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Participation rights have important downstream consequences. They are complicated and can be confusing—we cover the topic in detail in Choosing a Financing Structure.

Terms when Financing with Convertible Instruments

Interest, valuation cap, and discount are all additional terms that will come up on your term sheet if you are financing with convertible notes or convertible equity.

When negotiating a term sheet, founders need to own the discussion around how their convertible instruments will convert, as the VC they’re negotiating with won’t have information on their cap table. Many founders are shocked when their counsel tells them how much they’re going to be diluted in a priced round after they have raised multiple convertible notes or safes, because they did not understand the interplay between valuation caps and conversion to equity. We elaborate on all of these terms and the details of conversion in Choosing a Financing Structure.

important Make sure you discuss with investors whether convertible notes or safes will be converted in the pre-money or post-money valuation. If you’re negotiating a cap on a convertible instrument, make sure both sides of the table—and your legal docs—are clear on whether the cap is pre-money or post-money.

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