What is Valuation Cap?
The highest company valuation at which a SAFE or convertible note turns into shares. A lower cap means more shares for the early investor, so it protects their stake when the next round is priced far higher.
$10M cap · $20M round · 2× shares per $
A valuation cap sets…
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In real work
Diego's $50,000 converted at the $5 million valuation cap, even though the seed round priced the grant-writing startup at $20 million.
In the illustration
The round pointer climbs the price scale to $20M, but the SAFE's pointer hits the cap stop at $10M and stays there. The press then stamps two share blocks for the SAFE's dollar and one for the new investor's dollar.
In your deal notebook, show how a $50,000 note converts under a $6 million valuation cap if the next round prices the company at $4, $6 and $12 million. Show the arithmetic and state each assumption you made.
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