A valuation cap is a maximum valuation set on convertible instruments like a SAFE (Simple Agreement for Future Equity) or a convertible note. It establishes the highest company value at which early investors can convert their investment to equity, allowing them to secure a fair share of the company.
How does a valuation cap benefit startups?
A valuation cap helps attract early investors by ensuring they get a solid stake if the startup grows fast, providing startups with the capital they need without immediately setting a formal valuation.
How can a valuation cap affect founders?
While it brings in early funding, a valuation cap can mean founders give more equity if the startup’s value rises quickly before the next round.
When should startups consider a valuation cap?
Valuation caps are common in early funding rounds, especially with SAFEs or convertible notes, helping startups secure early investments while rewarding initial supporters.
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