Glossary — funding
Valuation cap
Also known as: cap
A valuation cap is the maximum valuation at which an early investment (SAFE or convertible note) will convert into equity, protecting the investor from being diluted if the company's valuation skyrockets.
How it works
Valuation caps let early investors lock in their effective price-per-share. If a SAFE has a $10M cap and the company later raises at a $50M valuation, the SAFE converts as if the company were worth $10M — giving the investor a much larger ownership stake than the new investors get for the same dollar amount. Caps are negotiated; lower caps are better for investors, higher caps are better for founders.
Worked example
A $200K SAFE with a $5M cap, in a company that later raises Series A at $20M, converts as if the company were worth $5M — so the investor owns 4% instead of 1%.