Does the Valuation Cap of my recent SAFE or Convertible Note impact my valuation?

The Valuation Cap is a future maximum benchmark whereby the ownership of the Convertible Note or SAFE holders will be calculated. Thus, unlike a Preferred Financing where a current valuation is set, the current valuation is unknown. However, consider the following three options (all else equal):

  1. Take $1M at a $3M Valuation Cap.
  2. Take $1M at a $4M Valuation Cap.
  3. Take $1M at a $5M Valuation Cap.

In an arms-length transaction where the company and the investors are acting in the own best interest, the company would consider option 3 as the best financing option (given that it would have the least dilution impact). 

All else equal, the higher Valuation Cap would imply a higher current Fair Market Value.

Additionally, when comparing two companies, the one with the higher Valuation Cap would arguably have a higher implied valuation. As such, it is critical that the Valuation Cap is considered in assessing the Fair Market Value of the company in today’s terms.

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