Valuation cap

The maximum valuation at which a SAFE or note converts, regardless of what the priced round is actually done at.

Example

A $5M cap converting into a round priced at $20M means the early investor gets shares as though the company were worth $5M — four times the equity per dollar.

Important

The cap, not the headline round price, is what determines what your early investors actually own. This is where founders are most often surprised.

Related terms

• SAFE — Simple Agreement for Future Equity — an investor gives money now in exchange for shares later, when a priced round happens. It is not a loan and has no interest or maturity date.
• Convertible note — A loan that converts into equity at a future priced round, usually with a discount and a valuation cap. Unlike a SAFE it carries interest and a maturity date.
• Discount (on a SAFE or note) — A percentage reduction on the priced round's share price, rewarding the investor for coming in earlier.
• Dilution — When new shares are issued, existing shareholders own a smaller percentage of the company than before.

Lessons that explain it

• SAFEs and convertible notes — How most first money is raised now — fast, cheap, and much easier to get wrong than founders expect. (15 min)

All 176 terms in the Founder glossary