A valuation cap is a term used in convertible notes and SAFEs (Simple Agreements for Future Equity) that establishes the maximum valuation at which an investor's investment will convert into equity during a future financing round. This cap protects early investors by ensuring that they receive equity at a favorable valuation compared to new investors if the startup's valuation increases significantly. It serves as a negotiation tool, balancing the interests of both entrepreneurs and investors during the structuring of venture capital deals.
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