Meaning
Mathematical variances between the intended maximum valuation and the figure recorded in a convertible instrument create conflicting claims during an equity round. Any valuation cap discrepancy must be reconciled before the final share count is fixed.
Typographical Origin
Errors in the drafting of a note or a safe often result in a valuation cap discrepancy that favors one party over the other. A misplaced decimal or an incorrect number of zeros changes the price of every share issued. These mistakes are often discovered only when the company prepares for a new round of investment.
Correction Protocol
Fixing the error requires a written amendment signed by both the company and the holder of the security. If the parties cannot agree on the correction, they must look to contemporaneous emails and term sheets to prove the original intent. This reconciliation process is a common source of friction between founders and early investors.
Economic Weight
Impact of a discrepancy is measured in the percentage of the company owned by each party after conversion. A lower cap results in more shares for the investor and less for the founders. Resolving the variance is necessary to ensure that the final ownership structure matches the commercial agreement.
