Valuation Cap

The maximum company valuation a SAFE or convertible note's conversion price can be based on, protecting the early investor from paying a later round's higher price.

Example

A 5,000,000 cap against a 10,000,000-share pre-round count sets a 0.50 conversion price, regardless of what the priced round itself charges new investors.

Important

A cap is not a valuation of the company - it is a ceiling on one investor's own conversion price, and most caps are set well above what a company could actually raise a round at.

Related terms

• SAFE (Simple Agreement for Future Equity) — A contract that gives an investor the right to receive shares in the future, at a price set by a formula, rather than issuing shares immediately. It is not debt and carries no interest or maturity date.
• Convertible Note — A short-term debt instrument that converts into equity at a future financing round, carrying interest and a maturity date, unlike a SAFE.
• Pre-Money Valuation — A company's agreed value immediately before a financing round's new money is added.

Lessons that explain it

• A SAFE is a promise of future shares, and post-money SAFEs stack on the founders — A SAFE gives an investor the right to shares at a future priced round, usually at a valuation cap. With post-money SAFEs, each additional SAFE dilutes the founders rather than earlier SAFE holders. (12 min)
• A convertible note is a loan that usually becomes shares, at the better of two prices — A convertible note is debt that converts into equity at a future round, typically at the lower of a discounted price or a capped price, with interest added to the amount converting. (12 min)
• Convertibles trade speed and low cost for an unsettled price — SAFEs and notes close quickly and cheaply but defer the valuation and the governance. Priced rounds cost more and take longer, and they settle ownership, rights and price now. (11 min)
• A SAFE is a promise of a share, not a share — Most angel checks do not buy stock on the day they are written. They buy a contractual right to receive stock later, at a price a formula computes - and almost nobody reads the formula closely enough to know what it will say. (10 min)

All 578 terms in the Investing glossary