Deal Terms
Fair Market Value Trigger
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.
Related Concepts
Further Reading
Exercise or Wait? A Guide to Startup Stock Option Decisions
Should you exercise your stock options now or wait? The answer depends on taxes, risk tolerance, and your company's trajectory. Here's a framework for making the right call.
409A Valuations Explained: Why They Matter for Your Stock Options
The 409A valuation sets the price you pay for your stock options. Here's how it works, why early employees get a better deal, and what happens to your strike price as the company grows.
Startup Equity Compensation Explained: Stock Options, RSUs, and More
ISOs, NSOs, RSUs, restricted stock — startup equity comes in many flavors. Here's what each type actually means for your compensation, your taxes, and your financial future.
How to Negotiate a Term Sheet as a First-Time Founder
Your first term sheet is exciting and terrifying. Know what's negotiable, what's standard, and the practical tactics for pushing back on liquidation preferences, board seats, and protective provisions.
How to Read a Term Sheet: A Practical Breakdown
Term sheets aren't designed to be readable. Here's a section-by-section guide to what matters, what's standard, and what should make you walk away.
Anti-Dilution Provisions Explained: What Every Founder Needs to Know
How anti-dilution provisions work in venture capital — full ratchet vs. weighted average, how they affect founder ownership in down rounds, and what to negotiate in your term sheet.
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