How do I set the right valuation cap?

The cap should reflect the current stage risk and expected future valuation. It is essentially an implicit current valuation. Set it high enough that you are comfortable with the dilution, but low enough to attract investors who need a meaningful discount to the expected Series A price. Common ranges: pre-seed $2-6M, seed $5-15M.

What happens if the next round valuation is lower than the cap?

The SAFE or note converts at the lower actual round valuation (or at the discounted price if a discount also applies). The cap is a ceiling, not a floor. If you set a $10M cap and raise your Series A at $8M pre-money, the investor converts at $8M (or lower with discount).

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GLOSSARY

Valuation cap

A valuation cap is the maximum company valuation at which a SAFE or convertible note converts into equity during a future priced round. It protects early investors by ensuring they get a minimum ownership percentage regardless of how high the company valuation goes in the next round. If the priced round valuation is below the cap, the instrument converts at the actual round price instead.

Why it matters

Protects early investors by setting a ceiling on conversion price regardless of future valuation.

If the next round valuation exceeds the cap, investors convert at the cap price, getting more shares.

Worked example

$100k SAFE with $5M cap. Series A at $10M pre-money. Investor converts at $5M cap, getting 2% instead of 1%.

Common pitfalls

Setting caps too low (excessive dilution); not understanding post-money vs pre-money SAFEs; stacking multiple SAFEs at different caps.

Frequently asked questions

Related terms

SAFE Pre-money

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