A valuation cap is applied to counter a scenario of run-away growth in the period after investment but prior to conversion. It limits the maximum price set for conversion of the convertible. Investors are then able to benefit in the upside of their investment as they would have in a straight equity investment.
If the trigger event is at a valuation that exceeds the cap, the convertible investors will receive equity at the cap. This means the effective discount they receive on the share price increases. If, for example, the initial discount offered was 15% with a valuation cap of £4 million but the convertible is triggered by a round at a valuation of £5 million, convertible investors would convert at a valuation of £4m; this means they have received a 20% discount to the £5m valuation set by the trigger event.