Valuation Cap

Also known as: Cap, Valuation Ceiling, Conversion Cap, Değerleme Tavanı

In short

The upper limit of the valuation at which a SAFE or convertible note converts into shares; it protects the early investor if the company is valued higher in the next round.

A valuation cap sets the maximum valuation at which an early investor’s money, invested through a SAFE or convertible note, converts into shares. In return for the risk taken, the early investor thus benefits from the increase in value in the next round.

How It Works

If the company raises its next funding round at a valuation above the cap, the early investor’s money converts into shares at a lower share price calculated on the cap valuation.

Example: Suppose USD 500,000 is invested through a SAFE with a cap of USD 5 million. If the company raises its next round at a pre-money valuation of USD 10 million, the early investor’s share price is half the price paid by the new investor. The investor thus acquires about twice as many shares for the same amount.

Pre-money and Post-money Caps

Pre-money cap: The cap is applied as the pre-conversion valuation. Other instruments converting in the same round also dilute the investor.
Post-money cap: The cap is applied as the valuation after all SAFEs convert. The investor knows its stake at signing; in exchange, each new SAFE dilutes only the founders.

When issuing several SAFEs, founders should know which method is used and calculate the total dilution in the cap table.

Relationship with the Discount

A cap is often combined with a conversion discount. In that case, the investor receives shares at whichever is lower: the cap price or the discounted round price. Under Turkish law, conversion takes place through a capital increase, so the conversion price must not fall below the par value of the shares (TCC Art. 347). The method for calculating the number of shares to be issued should therefore be written clearly in the agreement.

Frequently Asked Questions

Does the valuation cap mean the company's value?

No. The cap is not an agreement on the company's current value; it is only the upper limit of the valuation applied on conversion. If the next round is at a valuation below the cap, conversion takes place at that round's price or the discounted price.

If there is both a cap and a discount, which applies?

In practice, the calculation more favourable to the investor, that is, the one giving the lower share price, applies. This rule should be written expressly in the agreement.

← Glossary A–Z