Definition
A valuation cap sets a maximum valuation used when converting a SAFE or convertible note into equity in a priced round. A lower cap generally means a lower conversion price and more shares for the investor.
How to use it
- Cap price is often modeled as cap / fully diluted shares at conversion (simplified).
- Caps matter most when the priced round valuation is meaningfully higher than the cap.
Common mistakes
- Using non-fully diluted share counts when computing cap price per share.
- Assuming cap mechanics are identical across SAFEs and notes (terms vary).
Why this matters
This term matters because cash timing and risk are usually the difference between a plan that works on paper and a plan that survives. Use consistent definitions so decisions are comparable over time.
Practical checklist
- Write a 1-line definition for "Valuation Cap" that your team will use consistently.
- Keep the time window consistent (weekly/monthly/quarterly) when comparing trends.
- Segment results (channel/plan/cohort) before drawing big conclusions from blended averages.
- Use a calculator that references this term (e.g., SAFE Conversion Calculator) to sanity-check assumptions.
- Read the related guide (e.g., SAFE: what it is, valuation cap vs discount, and conversion basics) for context and common pitfalls.
Where to use this on MetricKit
Calculators
- SAFE Conversion Calculator: Estimate how a SAFE converts in a priced round using a valuation cap and/or discount (simplified).
- Convertible Note Conversion Calculator: Estimate how a convertible note converts in a priced round with interest plus a valuation cap and/or discount (simplified).
Guides
- SAFE: what it is, valuation cap vs discount, and conversion basics: A practical guide to SAFEs: how valuation caps and discounts work, what converts in a priced round, and common modeling pitfalls.
- Convertible note: interest, cap/discount, and conversion basics: A practical guide to convertible notes: how interest accrues, how caps and discounts affect conversion price, and common modeling pitfalls.
- Fundraising & valuation hub: pre/post-money, SAFEs, notes, and liquidation prefs: A practical hub for startup fundraising and valuation basics: pre/post-money, pro rata, option pool shuffle, SAFE/note conversion, and liquidation preference outcomes.