Work backwards. Decide how much you need and how much of the company you are willing to sell for it, typically 10–20% at pre-seed. The post-money cap is the amount raised divided by that percentage: $1M for 15% means a cap of about $6.7M. Then sanity-check it against your evidence and your next round.
- Post-money cap = amount raised ÷ target ownership sold.
- Pre-seed rounds commonly sell roughly 10–20% in total.
- A cap that is too high can make the next round a "down" conversion story; too low gives away more than needed.
- The cap is a ceiling for conversion, not a valuation of the company today.
- Check current market data (for example Carta's reports) for your stage and region.
What does the cap actually do?
The valuation cap sets the maximum valuation at which a SAFE or convertible loan converts into shares. If the next round is priced above the cap, the early investor converts as if the company were valued at the cap and receives more shares. It rewards early risk. It is not a statement that the company is worth that amount today.
What is the method?
- Set the amount from a budget tied to milestones, not from what others raised.
- Set the dilution you can accept for this round, leaving room for later rounds and an option pool.
- Divide: cap = amount ÷ dilution.
- Check the next round: will your milestones justify a priced round meaningfully above this cap?
| Raise | 10% sold | 15% sold | 20% sold |
|---|---|---|---|
| $500,000 | $5.0M cap | $3.3M cap | $2.5M cap |
| $1,000,000 | $10.0M cap | $6.7M cap | $5.0M cap |
| $2,000,000 | $20.0M cap | $13.3M cap | $10.0M cap |
How do you sanity-check the number?
- Evidence: a working product, users, revenue or a team with a track record justify a higher cap than an idea.
- Geography: European pre-seed caps are often lower than in the US for similar companies.
- Investor reaction: if experienced investors push back consistently, the market is telling you something.
- The next step: a cap you cannot grow into makes the next raise harder.
What mistakes cost the most?
- Stacking several SAFEs at different caps without modelling the total. See our worked SAFE example.
- Letting the cap rise for each new investor without telling earlier ones, which creates resentment and side letters.
- Forgetting the option pool, which comes out of founders at the priced round. See the option pool shuffle.
For the instruments themselves, read SAFE vs convertible note vs priced round, and for German companies can a GmbH use a SAFE?.
What does the cap mean for the next round?
| Next round pre-money | SAFE with $6.7M cap converts at | Effect for the early investor |
|---|---|---|
| $5M | Round price (below cap) | No cap benefit; discount may apply |
| $10M | Cap ($6.7M) | About 1.5× more shares than new investors per dollar |
| $20M | Cap ($6.7M) | About 3× more shares per dollar |
If the next round prices below your cap, early investors gain nothing from the cap. Founders often see this as fine; investors see it as poor risk-reward. A cap you can comfortably grow past keeps everyone aligned.
Cap, discount or both?
- Cap only: the most common YC post-money SAFE form.
- Discount only: rewards early investors with a percentage off the next round price, typically used when no one wants to set a valuation.
- Cap and discount: investor gets whichever is better. More investor-friendly.
- MFN, no cap: the investor takes the best terms later SAFEs get. Useful for very early, small cheques.
How do you defend your number in a meeting?
Explain the method, not the number: "We need this amount to reach these milestones, and we are selling about 15% to do it." Investors respect a cap derived from a plan more than a cap borrowed from a headline. If they push back, ask what milestone would justify your number and consider a smaller first close.
Frequently asked questions
How do you calculate a valuation cap?
Divide the amount you are raising by the share of the company you are prepared to sell. Raising $1M for 15% implies a post-money cap of about $6.7M.
Is a valuation cap the same as a valuation?
No. It is the maximum valuation at which the instrument converts. The company's valuation is set later, in a priced round.
What is a typical pre-seed valuation cap?
It depends heavily on stage, traction, sector and region, and changes with the market. Use current data sources and investor feedback rather than a single number.
Should all investors in a round get the same cap?
Usually yes for a single round. Different caps for different investors are common only across separate rounds or tranches.
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Join the waitlist →Sources and further reading. Y Combinator, SAFE documents; Carta data.
Educational material, not legal, tax or investment advice. Rules and figures change; confirm with qualified counsel or a tax adviser in your jurisdiction before acting. Last updated October 6, 2026.