Convertible notes are very company-friendly and institutional angels will use valuation caps to balance the risk more in their favor. Since the caps are really

Convertible notes are very company-friendly and institutional angels will use valuation caps to balance the risk more in their favor. Since the caps are really best guesses of what future valuation might be, they don't affect stock pricing for the company going forward (a reasonable explanation of how they work can be found here: http://www.spartina.com/items/20685-convertible-note-cap http://www.spartina.com/items/20685-convertible-note-cap) and so the valuation question actually does get deferred in a legal sense. In the deals we do, I tell founders to avoid using caps and they tend not to be used since they create complications for the downstream funding by working to give unduly steep discounts from actual Series A valuation in some cases. Surprisingly, however, the issue usually doesn't even come up in most cases because it is the institutional angels who will tend to insist on caps and my clients normally avoid such angels, preferring instead to work with the "successful entrepreneur" wealthy individual type of angel (who will either be fine with using convertible notes without caps or, if he insists on putting a value on the investment, will just push for a straight Series A investment - again, if done on "friendly" terms, which these easily can be in such cases, the cost associated with the investment might be $5K or so, thereby not constituting any serious drain on, say, what is typically a $200K investment or so).