"Uncapped" and "Cap" are terms often used in relation to investments, particularly in scenarios such as convertible note financings or equity funding rounds.
A "Cap", in this context, is a limit that is placed on the maximum potential return or valuation that an investor could receive or that a company could reach. For instance, in a convertible note financing, a cap is often placed on the valuation at which the note will convert into equity. This provides some level of protection to the investor, as it sets a maximum company valuation at the point of conversion.
On the other hand, "Uncapped" means there is no such limit. An uncapped note or investment does not set a maximum valuation or return. While this can potentially offer greater upside to the investor if the company performs exceptionally well, it also introduces more risk, as the final outcome is less predictable.
These terms play an important role in negotiations between investors and companies, often serving as key points of discussion and consideration in determining the terms of an investment.
