How do I pick a valuation cap?
FundraisingEquity
A valuation cap is a ceiling. When the SAFE or note converts in your priced round, the investor's money is converted as if the company were worth the round's valuation or the cap, whichever is lower. An investor who put in $250,000 under a $5 million post-money cap converts into 5 percent of the company, measured just before the new money in that round comes in, however high the round prices. The cap is the investor's reward for coming in before anyone had priced the company.
How founders usually set it
- Start from where you expect the priced round to land, and set the cap below it. The gap is what the early investor is paid for the risk.
- Look at what comparable companies at your stage raised on. Seed caps move with the market, and an investor will know the going range.
- Work back from ownership. Under a post-money cap, total SAFE money divided by the cap is the share of the company the SAFEs will take. A $1 million round at a $5 million cap is 20 percent.
What goes wrong
A cap set too low gives away more of the company than the round needed. A cap set too high can price the SAFE at or above the next round, at which point the investor gets no discount for having taken the early risk, and future investors will ask why. The cap is a negotiation, but it is one you should walk into with the dilution already worked out.
Arabella Venture Math models a SAFE round at any cap and shows what the founders own after it and after the rounds that follow.
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Written by the lawyers who built Arabella. This is legal information, not legal advice for your situation, and reading it does not make us your lawyers. For a real dispute or a high-stakes decision, talk to a licensed attorney. More questions.