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What should the valuation cap be?

What should the valuation cap be?

The Valuation Cap is the most important term of a convertible note or a SAFE. It entitles investors to equity priced at the lower of the valuation cap or the pre-money valuation in the subsequent financing. Typical Valuation Caps for early stage startups currently range from $2 million to $20 million.

What is a SAFE valuation cap?

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.

Is safe valuation cap pre or post money?

The valuation cap in the new SAFE is post-money (as opposed to pre-money). But if an investor and company agree on a post-money valuation, then an investor’s resulting ownership is a function of their investment and the post-money valuation irrespective of the round size.

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Are SAFE Notes equity or liability?

Although SAFE agreements are not debt in the traditional sense and an argument can be made to record them as Equity; in practice, we see SAFE agreements recorded as long-term debt.

How do SAFE investments work?

A SAFE or safe stands for a “simple agreement for future equity”. The investors invests money in the company using a SAFE. In exchange for the money, with a SAFE, the investor receives the right to purchase stock in a future equity round (when one occurs) subject to certain parameters set in advance in the SAFE.

What does valuation cap means?

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).

Is valuation cap pre or post-money?

A valuation cap is pre-money: the ‘cap’ or limit is placed on the starting valuation of the company before the financing round. This process protects investors against dilution should the starting valuation of the company increase significantly between funding.

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What does a value cap mean?

Put simply, a valuation cap ensures that an investor’s contribution to a startup or company via a SAFE or convertible note is converted into equity at a set maximum price. Let’s say, for example, a company that enters into a SAFE or issues convertible notes to an investor with a valuation cap of $1 million.

What is a valuation cap for seed-stage investors?

A seed-stage investor takes a lot of risks early on. That risk is not rewarded if all the investor gets is the right to invest with others later when the company is more valuable. A valuation cap solves this problem for the investor. A valuation cap sets a maximum company value for purposes of determining what percentage equity the investor gets.

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.

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Should valuation caps be low or high?

It’s logical to think that an investor would want to set the valuation cap as low as possible. The lower the cap the potentially larger \% of the company their investment will convert into at the next round. However, this approach misses the point.

What is a safe (simple agreement for future equity)?

SAFE (simple agreement for future equity) notes are a simpler alternative to convertible notes. They were created in 2013 by Y Combinator, a Silicon Valley accelerator, and allow startups to structure seed investments without interest rates or maturity dates. SAFEs are short five-page documents.