A nice post this week from Bryce Roberts of OATV – “A Cap is Not a Valuation” – covering one of the subtle impacts of notes. Bryce writes about his fund’s initial hypothesis that they’d find opportunity investing in “second seeds” – companies which needed a little more capital before raising a more robust A Round. But the experiment failed. Why? Because lazy or aspirational rounds had been raised with high caps and it was difficult to get people to *not* treat those as valuations. From which people wanted equal or better terms.

We noted similar in our 2015 post about “Second Seeds” and why, despite the high volume, we rarely invest in these rounds. As described,

“the founders and current investors often overestimate the value of what’s been created so they’re seeking a meaningful step-up from the seed round (for example, an uncapped note at a small discount to the A Round)”

So if you’re raising a seed – especially a note (which I generally suggest to price instead) – don’t fall victim to an unreasonably high cap or assume that caps serve as a floor for the next round of fundraising. If you need to get more money in the bank in a second seed, optimize for speed and make up for the dilution but kicking ass into the A Round raise.