Glossary - Cap
Convertible notes are designed to convert into equity when the company raises more than $1M dollars in new capital. Without a cap or discount, the notes would typically convert at the same price as the equity issued in that financing.
A “valuation cap” entitles note holders to convert into equity at the lower of the valuation cap or the price in the subsequent financing. It is designed to protect seed stage investors from dilution if the size of the round is greater than the cap amount.