How does a valuation cap work in a SAFE?

Another term that can come with a SAFE is called a Valuation Cap. This is another way for the SAFE investor to get a better price per share than a later investor. If your company ends up raising money at a valuation above the “cap,” then the SAFE investor gets to convert at a share price equivalent to the cap.

Can you raise a SAFE after a priced round?

their SAFEs will convert at the same price that the series A investors have which has a lower price than the valuation cap. So, actually, there is the potential that this can go up. This percentage can be higher if the price round is valued at a lower price than the cap on the SAFE.

Does a SAFE note have a valuation cap?

SAFE notes usually include a valuation cap and a discount since founders have to offer these incentives to early-stage investors.

How does a valuation cap work in a convertible note?

A “valuation cap” entitles note holders to convert the outstanding balance on the note into shares of stock at the lower of (i) the valuation cap or (ii) the price per share in a qualified financing (or, if there is a discount in the note, then the discounted price per share).

How does a pre-money SAFE convert?

Basically, it’s an agreement in which an investor gives you money for your company now, with the expectation that you’ll convert that amount of money into shares of stock later on. That means that SAFEs usually require much less paperwork and negotiation than issuing shares of stock right away.

What happens when a safe converts?

A SAFE converts into shares at pre-agreed trigger events. These trigger events are usually: a ‘qualifying round’ (where the company raises a round of equity investment through the issue of shares to investors); or. an ‘exit event’ (where a company sells its shares or assets, or lists on a stock exchange).

How do safes work startups?

A SAFE (Simple Agreement For Future Equity) is the second main type of funding used by early stage startups to secure early venture capital. Like its compatriot the convertible note, a SAFE allows startups to receive funding in exchange for equity later on—it converts to shares at a future date.

What is the valuation cap in a safe?

The valuation cap in a SAFE is generally the same as the valuation cap in any other convertible security. The valuation cap sets the maximum valuation at which the SAFE will convert into equity.

How does a valuation cap work?

How Does a Valuation Cap Work? A “valuation cap” entitles note holders to convert the outstanding balance on the note into shares of stock at the lower of (i) the valuation cap or (ii) the price per share in a qualified financing (or, if there is a discount in the note, then the discounted price per share).

What happens if the startup valuation is lower than the cap?

There’s some decent chance that the startup raises their future equity round at a valuation lower than the cap or just slightly higher than the cap, in which case the discount comes into play and the cap doesn’t. In fact, there’s even higher chances the startup never makes it to an equity round.

When do investors take advantage of the cap on notes?

In this case, the investor only gets to take advantage of the cap if the company raises their future equity round at a valuation higher than $5M (20\% discount off $5M = $4M). So any valuation lower than $5M gives the investor exactly the same equity as if the note didn’t have a cap at all.