Valuation Cap

The maximum valuation at which a SAFE or convertible note converts into equity, regardless of the next round's price. It rewards early investors with more equity per dollar if the company's value rises.

If the next round prices above the cap, the early investor still converts at the lower capped valuation, buying more shares per dollar. If the round prices below the cap, the round price usually applies. The cap protects the early bet.

High enough to limit dilution but realistic enough that investors accept it. Setting it far below your likely next valuation gives away too much. It is a balance between closing the round and protecting ownership.

A cap limits the conversion valuation; a discount gives a fixed percentage off the next round's price. Many instruments have both, and the investor takes whichever is more favorable. Both reward early risk.

An uncapped SAFE or note converts at the next round's price, minus any discount, which is more founder-friendly but less attractive to investors. Early backers often insist on a cap to be rewarded for the risk.

A lower cap means the investor converts into more shares, diluting founders more. Stacking several low-cap instruments can cause surprising dilution at conversion. Always model the combined effect.