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The convertible note was really intended as an instrument for a “bridge financing” – when an equity round was imminent, and likely to occur, but the company needed some money in between. In that case, it made good sense to have a debt instrument, where the note holder then converted into equity when the financing occurred. Since the financing would likely happen in short order, there was no need to have a valuation cap in the note. And if the financing didn’t happen, the debt nature of the instrument ensured that the note holders would be first in line to get their money back — even if it were by virtue of a liquidation of the company’s assets. For taking the risk of the financing not happening the note holder received a discount on the price of the round. In such a scenario, where the note is genuinely being used as bridge financing, a note makes perfect sense.