Startup & fundraising
Valuation Cap
Formula reviewed by Tahir Asif, CMA
The maximum company valuation used to calculate a SAFE or convertible note's conversion price, protecting early investors from dilution.
A valuation cap sets a ceiling on the valuation used to convert a SAFE or note into equity, regardless of what valuation the actual priced round sets. If the round prices higher than the cap, the early investor still converts at the (lower) cap valuation — getting more shares for the same investment.
The cap and any discount rate both push the conversion price down; whichever produces the lower price for the investor (the more favorable one) is the one that actually applies, since the two are typically compared and the better term used, not stacked together.
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