Valuation Cap

A valuation cap refers to the point in time at which an investor can convert their SAFE into equity in the business, and is based on either a valuation or price target. It “caps” the conversion price of the issued shares and ensures that early investors receive an immediate upside on their equity purchase.Early stage startups leverage valuation caps to incentive their seed stage investors to take on additional risk. The lower the valuation cap, the larger the percentage of equity the investor will get.For example, if the current price per share is $5 and the SAFE has a 50% discount, the investors would convert it into shares at $2.50 so that they recognize an increase in value of $2.50 on paper.

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