Deal Terms
Valuation Cap
The maximum valuation at which a SAFE or convertible note converts into equity, protecting early investors from high Series A prices.
A valuation cap is a key term in SAFEs and convertible notes that limits the conversion price for early investors regardless of the Series A valuation. If you invest $500K on a $5M cap SAFE and the Series A is priced at $20M pre-money, your SAFE converts as if the company were worth $5M — giving you 4x more shares than Series A investors for the same dollar amount. The cap rewards investors for taking earlier risk. Investors prefer lower caps (more shares); founders prefer higher caps (less dilution). The cap effectively represents the pre-money valuation the investor is implicitly paying. Multiple SAFEs with different caps create complex conversion scenarios — founders should model out the fully diluted cap table at conversion to understand the real dilution impact.