I think this is a bit misunderstood.
A cap is a price, well at least it’s sort of a price. And the market sets the price. It is what it is. So there is no such thing as “too low of a cap”.
What is problematic is when you sell too much of a company. If you do, subsequent investors will be worried. They’ll worry the founders won’t be motivated enough. They’ll especially worry if an early, nonstandard investor has a controlling interest.
A “problem” with notes is you don’t have to bother to calculate dilution or even put together a cap table to raise money with them. You can almost accidentally sell more of your company than you intended. Which is basically impossible when you sell traditional shares in a traditional venture round. Because there, everyone agrees on a cap table, a price per share, and every single term. So you know.
So as a rough rule: be careful not to accidentally sell > 40-50% of your startup with convertible notes, IF you want to raise traditional VC money later. That will scare folks off.
Pay attention to what that paperwork really means.
