What are capped notes?
Capped notes are convertible promissory notes that include a valuation cap — a pre-agreed maximum company valuation at which the notes convert into equity in the next priced round. The cap protects early note-holders from excessive dilution if the next round prices the company well above the cap.
Capped notes are common in seed-stage fundraising in the U.S. and increasingly in Türkiye. Key economic terms include the cap amount, discount rate (typically 15%–25% off the next-round price), interest rate, maturity date, and conversion mechanics. Sophisticated investors negotiate both a cap and a discount and convert at whichever is more favourable.