Deal Terms
Last updated
Quick Answer
A contractual threshold based on a company's fair market value that activates certain rights, obligations, or conversion mechanisms.
A fair market value trigger is a provision in investment documents that activates specific rights or obligations when the company's fair market value reaches a defined threshold. Common applications include automatic conversion of preferred stock, exercise windows for warrants, earn-out payments, or the activation of anti-dilution protections. The challenge lies in determining fair market value for private companies.
In Practice
The convertible note included a fair market value trigger: if the company's FMV exceeded $100M before the next priced round (as determined by an independent 409A valuation), the note would automatically convert at a $30M cap rather than waiting for a qualifying financing event.
Why It Matters
FMV triggers create actionable milestones tied to company value rather than arbitrary dates or events. However, they introduce valuation disputes because private company FMV is inherently subjective and can vary significantly depending on the methodology used.
VC Beast Take
The biggest challenge with FMV triggers is the valuation itself. 409A valuations are backward-looking and conservative, while VC-backed company values are forward-looking and optimistic. This gap creates opportunities for gaming and disputes.
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A fair market value trigger is a provision in investment documents that activates specific rights or obligations when the company's fair market value reaches a defined threshold.
Understanding Fair Market Value Trigger is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
Fair Market Value Trigger falls under the deal-terms category in venture capital. This area covers concepts related to the financial and legal terms that define investment agreements.
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