Valuation Cap
Definition
Valuation Cap: A valuation cap is the maximum company valuation at which a convertible note or SAFE converts to equity. It protects early investors by ensuring they receive a minimum ownership percentage regardless of how high the valuation goes in the next priced round. If the priced round valuation exceeds the cap, investors convert at the cap valuation.
Example Usage
“We raised a $500K SAFE with a $5M cap. When we did our Series A at $15M, the SAFE investors converted at the $5M cap, getting 3x more shares than later investors.”
Common Misconceptions
Related Terms
SAFE
A SAFE (Simple Agreement for Future Equity) is an investment contract that gives investors the right to receive equity in a future priced round. Creat...
Convertible Note
A convertible note is a form of short-term debt that converts into equity during a future financing round. It includes interest, a maturity date, and...
Pre-Money Valuation
Pre-money valuation is the value of a company immediately before receiving new investment. It determines how much equity investors receive for their i...
Dilution
Dilution occurs when a company issues new shares, reducing existing shareholders' ownership percentage. In each funding round, founders and early inve...
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