The Prevalence of Valuation Caps in SAFEs (Before a Priced Round)
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SAFEs are the most common convertible instrument for startups looking for capital before priced equity rounds. While the use of Uncapped SAFEs (those issued without a valuation cap) has traditionally been less common, there has been a slight uptick in their prevalence in recent years. Between 2020 and 2024, the prevalence of pre-priced round SAFEs issued without a valuation cap increased from 7% to 11%.
A valuation cap sets the maximum valuation at which a convertible instrument will convert to equity regardless of the company’s actual valuation when it raises a priced round. Valuation caps are often seen as investor-friendly provisions as they protect investors from dilution in the event that the company raises its priced round at a very high valuation. However, the recent uptick in the frequency of uncapped SAFEs could potentially indicate a lack of certainty in the valuation environment, which has been choppy over the last few years.
For example, say an investor invests $500,000 through a SAFE with a $20 million valuation cap. Setting other variables aside for purposes of the example, the investor has secured at least a 2.5% stake in the company. Here is what happens in three scenarios:
Scenario 1 — Valuation under cap: If the company raises a priced round at a $10 million post-money valuation, the valuation cap has not been met and the SAFE will convert at $10 million giving the investor 5% ownership.
Scenario 2 — Valuation over cap: If the company raises a priced round at a $25 million valuation, the valuation cap has been met and the SAFE will convert at $20 million giving the investor 2.5% ownership.
Scenario 3 — Uncapped SAFE: If the SAFE was purchased at the same $500,000 but without a valuation cap and the company raised a priced round at a $25 million valuation, the investor would only receive a 2% stake in the company.
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