Valuation Cap

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

Full Definition

A valuation cap is the maximum company valuation at which a SAFE or convertible note will convert to equity in a future financing round. It protects early investors by ensuring they receive a favorable conversion rate even if the company's valuation increases dramatically before the next priced round.

How Valuation Caps Work

If a SAFE has a $5M cap and the company later raises a Series A at $20M pre-money, the SAFE converts as if the company were valued at $5M (not $20M), giving the investor 4x more shares than they would get without the cap.

Cap vs No Cap

With Cap: Standard for most SAFEs; gives investors downside protection and upside participation
Without Cap: Very founder-friendly; investors accept risk of converting at whatever the next round's price is
Cap + Discount: Investor gets the better of the two; common in early rounds

Real-World Example

An investor puts $100K into a SAFE with a $4M cap. The Series A prices at $12M pre-money. The SAFE converts at the $4M cap, giving the investor 2.5% instead of ~0.8%.

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