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legal terms in business
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Prakhar SharmaTop Contributor
Social media marketer, Content Writer

The Valuation Cap is the most important term of a convertible note or a SAFE. It entitles investors to equity priced at the lower of the valuation cap or the pre-money valuation in the subsequent financing. Typical Valuation Caps for early stage startups currently range from $2 million to $20 million.

The valuation cap is a way to reward seed stage investors for taking on additional risk. The valuation cap sets the maximum price that your convertible security will convert into equity. To translate that into a share price, you divide the valuation cap by the series A valuation. 

Let's say you invest in a startup using a note with a $3 million cap. If the series A investors decide that the company is worth $6 million dollars and pay $1/share, your note will convert into equity AS IF the price had actually been $3 million. By dividing $6 million by $3 million we get an effective price $.50/share. That means that you will get twice as many shares as the series A investors for the same price.

Depending on the nature of the business, you may need the following permits, licenses, or regulations:

  • Permits need for regulated businesses (aviation, agriculture, alcohol, etc.)
  • Sales tax license or permit
  • Home based business permits
  • City and county business permits or licenses
  • Zoning permit
  • Sellers permit
  • Health department permits (e.g., for restaurants)
  • Federal and State tax/employer IDs