Valuation cap
A valuation cap is the number a SAFE holder's cheque gets divided by to produce their ownership percentage. On a post-money SAFE that is the whole of it. It is not what your company is worth, it is not a price anyone paid, and nobody is claiming your company is worth that today.
The distinction matters because the cap gets negotiated as though it were a valuation, when what it actually sets is a percentage.
The cap table we will use
| Holder | Shares | Ownership |
|---|---|---|
| Founders | 8,100,000 | 90.0% |
| Option pool | 900,000 | 10.0% |
| Total | 9,000,000 | 100.0% |
An angel writes $600,000 on a post-money SAFE with a $6,000,000 cap.
The arithmetic
$600,000 ÷ $6,000,000 = 10.00%
That is the answer. The holder owns 10.00% of the company as of the moment immediately before new round money arrives, and no share count was needed to work it out.
The share count follows from it rather than producing it. If the holder owns 10.00%, everyone who was there before owns the remaining 90.00%, so the 9,000,000 existing shares are 90.00% of the total:
9,000,000 ÷ 0.90 = 10,000,000 shares, of which the holder gets 1,000,000.
| Holder | Shares | Ownership |
|---|---|---|
| Founders | 8,100,000 | 81.0% |
| Option pool | 900,000 | 9.0% |
| SAFE holder | 1,000,000 | 10.0% |
| Total | 10,000,000 | 100.0% |
What the cap costs you
Same $600,000 cheque, four different caps.
| Cap | Holder owns | Founders keep |
|---|---|---|
| $4,000,000 | 15.00% | 76.50% |
| $6,000,000 | 10.00% | 81.00% |
| $8,000,000 | 7.50% | 83.25% |
| $12,000,000 | 5.00% | 85.50% |
Two things fall out of that table.
The relationship is exact and inverse. Halve the cap and the holder owns precisely twice as much. $12,000,000 gives them 5.00%, $6,000,000 gives them 10.00%. That part holds for any post-money cap, because it is a division.
On these numbers, moving from a $12,000,000 cap to a $6,000,000 one costs the founders 4.50 points. On a $600,000 cheque. The size of that gap depends on the cheque and the caps involved, so run it on yours rather than carrying 4.50 around.
What a cap is not
It is not a valuation. Nobody has valued your company. A cap is a ceiling on the price the earlier investor will pay later, agreed precisely because neither of you wanted to set a price yet.
It is not a floor. A cap protects the holder if you do well. It does nothing for them if the next round prices below it, and it does nothing for you in any scenario.
It is not comparable to the next round's valuation without doing the arithmetic. A $6,000,000 cap followed by a round at a $10,000,000 pre-money does not mean the holder made 67%. It means they own the 10.00% their division bought them, and then the round dilutes them along with everyone else.
What to check in your own documents
- Is it a post-money cap? If yes, the percentage is a single division and you can do it now.
- Write your caps down as percentages, next to each other. Dollars raised is the wrong unit for this question. Percentages add up, and the total is what you have already committed.
- Check your lowest cap first. It is the one buying the largest percentage per dollar, whichever instrument it sits on.
- A discount alongside a cap is a second candidate price. Only the lower of the two binds, so work out both before assuming which one applies.
Run it on your own numbers
One SAFE is one division. A stack of them, against your real cap table, with a round on top and the round after that, is where it stops being arithmetic you can hold in your head.
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