Valuation
What is Valuation Cap?
The maximum effective valuation at which a SAFE or convertible note will convert - protects early investors if the next round prices high.
A valuation cap is the upper limit on the implied valuation that a SAFE or convertible note will convert at. If the next priced round is below the cap, the SAFE converts at the round's price. If the round is above the cap, the SAFE converts at the cap - giving the investor a much larger share than their dollars would otherwise buy. The cap rewards early risk-taking. Post-money caps fix the investor's percentage ownership at signing; pre-money caps don't.
Example
- $1M SAFE at $5M post-money cap. Next round prices at $20M pre/$25M post. SAFE converts at the $5M cap - investor owns 20% (=1M/5M), not 4% (=1M/25M).