What is a valuation cap on a SAFE?
Written by For Founders Law, a Toronto firm licensed by the Law Society of Ontario. About us
Short answer
A valuation cap is the maximum company valuation at which a SAFE converts into shares. If your priced round values the company above the cap, the SAFE investor converts at the lower cap price and receives more shares than new investors get for the same money. On a post-money SAFE, the investment divided by the cap roughly gives the investor's ownership percentage before the priced round.
How does the cap work?
A SAFE converts into shares at your next priced round. Without a cap, it would convert at the round price, or the round price less a discount. The valuation cap sets a ceiling: if the round values the company higher than the cap, the SAFE converts at the price the cap implies instead.
That price is lower than what new investors pay, so the SAFE investor gets more shares per dollar. It’s the reward for investing earlier, when the risk was higher.
Can you show an example?
Say an angel invests $250,000 on a post-money SAFE with a $5,000,000 cap.
| Round values the company at $4M | Round values the company at $20M | |
|---|---|---|
| Cap applies? | No, round price is lower | Yes |
| SAFE converts at | Round price | Cap price |
| Angel’s ownership just before new money | About 6.25% | About 5% |
| Effect | Same price as new investors | Four times as many shares per dollar as new investors |
On Y Combinator’s post-money SAFE, the cap price is the cap divided by the company’s capitalization just before the round, counting founders, options, the pool and all converting SAFEs. That’s why $250,000 on a $5,000,000 post-money cap works out to about 5%. If the round price is lower than the cap price, the investor converts at the round price instead. Real conversions depend on the exact SAFE wording, so model it on your cap table.
Is the cap the same as a valuation?
No. It’s a ceiling for conversion, not an agreed value of the company today. It does tend to anchor expectations for the next round, so founders shouldn’t treat it casually.
How do I think about where to set it?
There’s no formula. Founders usually weigh:
- How much dilution they’re accepting. On a post-money SAFE, amount raised divided by cap roughly equals ownership sold. Raising $1,000,000 across SAFEs at a $10,000,000 cap means about 10%.
- The next round. A cap far above what you can raise at later creates pressure; one far below gives away more than needed.
- Stacking. Several SAFEs at different caps add up. See what is dilution?
We don’t advise on what your cap should be in dollar terms, but we can show how each scenario changes ownership.
What about uncapped SAFEs and MFNs?
Y Combinator publishes versions with a cap only, a discount only, or neither but with a most favoured nation term. An uncapped SAFE with only a discount gives the investor less protection if the company’s value rises sharply. An MFN SAFE lets the investor adopt better terms the company gives later SAFE investors.
Does a Canadian SAFE work differently?
The economics are the same, but use a form adapted for a Canadian corporation, such as the Canadian version Torys LLP publishes. Issuing a SAFE in Ontario also needs a prospectus exemption, such as the accredited investor or private issuer exemption, and some exemptions require an OSC filing within 10 days. See how do SAFEs work in Canada?
Our SAFE round work starts at $2,600, including the SAFE, board approval, exemption review and securities filing. See fees.
This guide is general information about Ontario and Canadian law, not legal or financial advice for your situation. To model your SAFE before you sign, book a free 15-minute consult.