Valuation
Also called cap, SAFE cap
A valuation cap is the maximum valuation at which a convertible note or SAFE will convert into equity, protecting the early investor from being diluted by a much higher priced round later.
An investor putting money in before a priced round takes risk without knowing the price. The cap sets a ceiling: however high the next round is priced, their money converts as if the company were worth no more than the cap.
Most instruments pair a cap with a discount, commonly 15% to 25%, and convert at whichever gives the investor more shares. In a strong round the cap almost always wins; in a flat one the discount does.
A cap is not a valuation. Founders sometimes describe raising on a $10m cap as raising at a $10m valuation, but the company has not been priced. The cap only sets the worst case for the investor.
Whether the cap is pre-money or post-money matters as much as its size. Post-money caps, which became standard with the 2018 YC SAFE, fix the investor's percentage at signing, so stacking several of them stacks dilution onto founders.
No. It is a ceiling on the conversion price, not a price the company has been valued at. Nothing is priced until a priced round closes.
The cap does not bind and the investor converts using the discount instead, which is why most instruments include both.
One both sides can live with if the company does well. A cap far below the eventual round price transfers a large share of the company to the earliest money, which the next investor will notice when they model the cap table.
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