The valuation cap is usually the term founders negotiate hardest on a SAFE. It sets the highest valuation at which the SAFE converts into shares, so if the next round is priced above the cap, the SAFE investor converts at the cap price and receives more shares than a new investor would for the same amount of money. That extra value is the investor's reward for taking the risk of investing early.
The cap on its own does not tell you how much of the company you are giving away, because that depends mainly on how much you raise against it and which form of SAFE you use. I think it is worth understanding the arithmetic before negotiating, so that you can see what happens if the next round is priced above or below the cap.
Turning the cap into a share price
The cap price is the valuation cap divided by the share count defined in the SAFE. If the defined capitalisation is 1,000,000 shares and the cap is $4 million, the cap price is $4 per share, so a $200,000 SAFE converts into 50,000 shares before any adjustments and rounding the document provides for.
In a post‑money SAFE, the defined capitalisation includes the SAFEs themselves, so dividing the investment by the cap gives a good estimate of the holder's percentage just before the priced round. In a pre‑money SAFE that shortcut does not work, and I explain the difference in how pre‑money and post‑money SAFEs affect ownership. For any other version, the calculation should follow that document's own definitions.
The investor has contractual rights from the moment the SAFE is signed, but only receives shares when conversion happens. The cap is also not a valuation of the company for tax purposes or for pricing employee options, since those need their own valuations prepared for their own purposes.
The cap price compared with the round price
Most SAFEs convert at the lower of the cap price and the price paid by new investors in the round, sometimes with a discount applied. If the round is priced below the cap, the SAFE converts at the round price, or at the discounted round price where the SAFE includes a discount.
A discount is a percentage taken off the round price, so at a $5 round price a 20% discount gives a conversion price of $4 per share. Where the SAFE gives the investor the better of the cap and the discount, both prices should be calculated and the lower one used, and where the document combines them in some other way, its exact wording should be followed.
It is also important to check which shares the SAFE converts into. Because SAFE investors convert at a lower price than new investors, giving them the same per‑share liquidation preference as the new money can give them more preference than they actually paid for, and many rounds deal with this through a separate sub‑series of preferred shares based on the conversion price.
The rights that sit alongside the cap
Many SAFEs come with a pro rata side letter, which gives the investor the right to buy more shares in the next round. The notice and allocation process, and any minimum holding the investor must keep to retain the right, should be written down, and these commitments should be recorded with the SAFE so that the plan for the next round takes them into account.
An MFN clause allows the investor to take the benefit of better terms the company later gives to someone else. Before offering a lower cap to a new investor, the company should work out what the MFN would do to earlier SAFEs and check any side letters for other rights.
The YC SAFE forms and guidance the company started from should be kept with the signed version, because comparing the two shows exactly what was changed, which is useful when the next investment or round is being prepared.
Add up the whole raise
Raising $100,000 at a $4 million cap is very different from raising $1 million at the same cap, so every SAFE should go into one model, including SAFEs with different caps and any notes with interest. With post‑money SAFEs, each new SAFE dilutes the founders and other shareholders while leaving earlier SAFE holders where they were, and the SAFEs add up before the priced round brings further dilution.
Options and the unallocated pool should be included on the basis the documents set out. If the next investor asks for the pool to be increased, the increase should be calculated at the point the term sheet specifies, and I show how that can change the outcome even when the headline valuation stays the same in how a funding round changes your ownership.
The ownership being committed should then be compared with what the money will achieve, in terms of how much runway it provides and which milestone the company expects to reach before it runs out. If the amount will not take the company to a point where the next round is realistic, I would suggest that the size of the raise matters more than the cap.
A sale or a shutdown
If the company is sold before the SAFE converts, the liquidity terms usually give the investor the greater of their money back or the value of their shares at the cap price. If the company closes down, the dissolution terms apply within the legal order of payment, and there may be little left once creditors have been paid. Both outcomes should be considered while the investment is being agreed, since neither depends on a priced round ever happening.
When the round closes, the final share numbers should be reconciled with the approvals and the company's records, and the conversion schedule and its assumptions should be kept together. Any difference between the company's figures and the investor's should be resolved before the shares are issued.
This article is general information and not legal advice. For guidance on your specific circumstances, speak with us directly.