Valuation Cap

A valuation cap is the maximum company valuation at which a SAFE or convertible note will convert into equity. It protects early investors from excessive dilution if the company's valuation grows significantly between the time they invested and the next priced round.

For example, an investor with a $5M cap who invests $250,000 will convert their investment as if the company were valued at $5M — even if the Series A is priced at $20M. Without a cap, the investor would receive far fewer shares for the same investment.

The valuation cap is the most important negotiating point in a SAFE or convertible note. A cap that is too high fails to meaningfully protect early investors; a cap that is too low excessively dilutes founders at the next round.

Caps are typically set based on the company's current stage, comparable early-stage valuations in the sector, and the relative risk the investor is taking. Pre-seed caps often range from $3M to $8M; seed caps typically range from $8M to $20M.