SAFE holders with Valuation Cap conversion terms are entitled to a ceiling, or cap, on the pre-money valuation at which the SAFE converts in the next Equity Financing. If the pre-money valuation in the Equity Financing goes above the cap, then the SAFE converts at the Valuation Cap regardless of the Company’s valuation in the next Equity Financing. If the pre-money valuation does not go above the cap, then the SAFE converts at the lowest price per share at which Preferred Stock is issued to new Investors.
Conversion Price for Valuation Cap = the lower of (1) the Valuation Cap divided by the Company’s Fully Diluted shares immediately prior to the Equity Financing, or (2) the lowest price per share at which Preferred Stock is issued to new Investors.
A Valuation Cap can be “pre-money” or “post-money” which differs based on whether outstanding convertible securities are included in the Company Capitalization when calculating the Conversion Price. Pre-Money valuation caps are generally better for founders and other existing stockholders.