Valuation Intermediate

Valuation Cap

The maximum valuation at which a SAFE or convertible note converts to equity.

Definition

A valuation cap sets the highest price at which a SAFE or convertible note will convert into equity. If the company's valuation at the next priced round exceeds the cap, the SAFE converts at the cap price instead, giving the investor a better deal. The cap protects early investors from excessive dilution if the company's valuation skyrockets before conversion.

Why it matters

SAFEs with low valuation caps convert into more shares, which increases dilution for everyone else. If your company raised a lot of SAFE money at low caps, the actual dilution at Series A may be larger than expected.

Example

An investor puts $500K into a SAFE with a $10M cap. The Series A prices at $30M. The SAFE converts at the $10M cap, giving the investor 3x more shares than if they had waited to invest at the $30M price.

Related terms

SAFE (Simple Agreement for Future Equity)
A simple investment contract that converts to equity at the next priced round.
Post-Money SAFE
A SAFE where the valuation cap includes the SAFE itself, making dilution clearer for investors.
Pre-Money SAFE
An older SAFE format where the valuation cap does not include the SAFE investment itself.
Convertible Note
A loan that converts to equity at the next funding round, with interest and a maturity date.
Discount Rate
A percentage discount SAFE or note investors receive on the share price in the next round.
Conversion
When a SAFE or convertible note transforms into actual equity shares at a priced round.

More from Valuation

This definition is an educational summary. It is not legal, tax, or investment advice. Specific terms in your equity grant or company documents may differ.