Key Questions: What is a SAFE with a valuation cap and no discount rate? Example 3, Equity Financing, Safe Valuation Cap, No discount = In this case the equity financing pre-money is equal to the Safe valuation cap. What are the required elements of this type of SAFE agreement? Depending on your negotiating skills and your company’s traction, you can get a SAFE or convertible note without a valuation cap. It’s a cap table grab that in a significant number of contexts won’t be made up for by other more minor changes to the SAFE (around pro-rata rights and option pool treatment) if a company ends up doing multiple convertible rounds. For example, if your business raises a venture round at a $10 million pre-financing valuation but your notes have a $3 million cap, your note holders just got a 70% discount (yep, you read that right). Many entrepreneurs think that a $4M cap means that any negotiated pre-money valuation higher than $4M results in the cap coming into play. A higher number is … The Double-Edged Sword of the Valuation Cap. Example: SAFE with both valuation cap and discount. In cases when both the valuation cap and the discount clause is included in SAFE, the investor weighs both the options at the time of valuation and converts his SAFE at the lowest possible rate. Similar to a convertible note, the Safe can be tailored to include a valuation cap, a discount or both (or neither), allowing it to be easily customized for the investor. The valuation cap is usually between $2,000,000 - $10,000,000. The Valuation Cap is an upper limit on the price per share a SAFE investor will pay for Series A stock. The valuation cap sets the ceiling on the price per share they will pay at the series-A round. Often a standard convertible note or SAFE will contain a “valuation cap.” If there is a valuation cap, there is a chance your convertible note or SAFE could convert into equity, such as Series Seed Preferred Stock , at such valuation cap (rather than at some discount of the price the other purchasers in the financing are paying). In this case, SAFE holders get fully protected for convertible dilution even if the valuation cap is higher. Using a SAFE means, technically, you can delay valuing your company. However, like convertible notes, some SAFEs will have a valuation cap or a maximum valuation at which the amount will convert. However, it’s pretty tricky to do in this environment with either instrument, so there is no clear winner for seed investment in this category. For example, if the SAFE contains a valuation cap, then there is a cap on the conversion price (i.e., it cannot be higher than the price per share based on the valuation cap). Similar to Example 2, the Safe instrument converts into preferred stock at a price per share determined by the equity financing pre-money valuation divided by company’s fully diluted outstanding shares. In this example, that means the future valuation must exceed $5M before the cap comes into play. If there is a discount, the investor typically can choose whether to take advantage of the better of the discount price or the valuation cap price. Suppose XYZ LTD raised $50,000 from Mr C by issuing a SAFE with a $5M valuation cap and 40% discount. This tool provides a template for a Simple Agreement for Future Equity (SAFE) with a valuation cap and no discount rate, also known as a "Standard SAFE" and can be adapted to suit your organization's needs. Customizations may also include additional protections for major investors, such as rights of first offer (ROFO) , observer rights , information rights and other rights. Valuation Cap. 3. It’s defined in terms of the company’s market cap rather than share price. But because of the 20% discount, the cap doesn’t come into play until the discounted amount exceeds the cap. So, parties are actually negotiating a valuation when raising the round under a SAFE that has a valuation cap. You are setting a valuation with this structure if you weren’t aware of the fact.
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