How to Determine A Fair Valuation Cap For Your Startup

An article we liked from Thought Leader Doug Bend of Bend Law Group, PC:

The Six Factors For Determining A Fair Valuation Cap For Your Startup

We have helped dozens of startups raise their seed round of financing.

Most of these companies have used the template Simple Agreement for Future Equity (better known as a SAFE) with a valuation cap that Y Combinator has open-sourced here.

One of the best attributes of the SAFE is the S, which stands for "simple" because only a few terms typically need to be negotiated with an investor. This helps to decrease the amount of time that the founders and the company's attorney need to spend on negotiating terms.

The most important of these is often the valuation cap, which provides the investor with a ceiling valuation for calculating the number of shares the investor will own if the SAFE converts. The valuation cap, therefore, provides the investor with the peace of mind of knowing that even if the company is valued at a much higher amount, the investor will still have a floor ownership percentage in the company if the SAFE converts.

Determining the amount of the valuation cap is more of an art than a science, but there are typically six key factors—let's take a look at them.

1. The Overall Fundraising Market

The first factor is the overall fundraising environment for early-stage startups.

For example, the current market for raising capital for startups has cooled off in recent months and is more pro-investor than it was in 2021.

2. Traction

The second factor is how much traction the company has. Investors are more likely to invest with a higher valuation cap if the startup can demonstrate that...