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What is a Price Cap?

When investors give money to startups, they exchange their investment for a piece of equity in the company. Sometimes, investors will buy into a company and will acquire convertible debt. This debt is held until a minimum amount of money is raised or a certain period of time passes. Then, it is converted into equity in the company. A price cap determines the maximum value on the price of a convertible debt before it becomes equity.

Price Cap Examples

Some examples of the benefits of a price cap to investors:

  • Example 1. Ensures investors get the highest return when large increases of value occur in a startup
  • Example 2. Incentivizes investors to take on riskier investments for a higher return

Check out this article about the concept of a price cap.

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