A conversion price cap is a type of provision often included in convertible securities such
as convertible notes or Safes. It is used to determine the maximum price per share at which the convertible note or Safe will convert into capital stock at the time of the financing resulting in the conversion, regardless of the valuation agreed to by the company and the new equity investors. The lower the conversion price cap, the greater the potential discount in the conversion rate of the convertible
note or Safe compared to the price per share paid by later investors.
It is important to note that the conversion price cap is only one of many variables that can have a significant impact on the ownership position of investors following the financing resulting in the conversion of notes and/or Safes. Companies should be careful not to lose sight of the impact that the conversion price cap might have at the time of a future fundraise.