Term sheet clause 22 of 25 · SAFEs and convertible notes
Valuation cap in a term sheet
In plain English: The maximum valuation at which the SAFE or note converts. Typical: Negotiated; post-money caps make dilution clear.
Founder-friendly
Higher cap.
Investor-friendly
Lower cap.
What to watch for
Red flag
Caps far below likely priced-round value.
How to model it
Don't judge this clause by reading it; put numbers on it. In our workbooks it's modelled in SAFEs; Convertible Notes, so you can see what it changes in your ownership or your payout before you agree.
Negotiating it: safes
Principle: Cap, discount and MFN.
- Prefer post-money SAFEs: dilution is clear.
- Agree either a cap or a discount where possible, not a low cap plus a discount.
- Track every SAFE in the Cap Table as you sign.
Angel wants a lower cap than others
"We've set the cap at [X] for everyone in this round so it's fair to all investors. We'd love to have you in on the same terms."
One of the scripts from the Negotiation Playbook. The playbook has more for each topic, plus what to give and what to hold.
Not legal advice. Norms vary by country and market cycle. Have a startup lawyer review your term sheet before you sign.