Patent Attorney and Founder
A long way of going about it, what I’m trying to say is the valuation cap essentially gives the investors an even bigger price break than the discount rate. When you’re negotiating with investors, you will find that one term that is going to be heavily shaded is going to be that valuation cap. Because when the SAFE converts, it converts at the price—it either converts at the discount or the valuation cap, not both. It’s going to convert at the one which gives the investor the bigger bang for their buck, and nine times out of ten, that’s going to be the valuation cap. They’re going to get more of a discount with it converting at the valuation cap.
So, to those entrepreneurs and startups out there who are thinking about raising a SAFE round or who may be in the middle of raising a SAFE round right now, it’s important to note that dynamic when it comes to the valuation cap. You’re going to want it set as high as possible, within reason. You can’t just throw out a random number; it has to be backed up. You have to do your research and see what other companies have raised that are in your industry, etc., etc. Because if you just throw out a random number there, aiming for it as high as possible within a reasonable range, whereas the investors want it as low as possible.