A valuation cap is a commonly included term in convertible instruments, like SAFEs and convertible notes. When used, it effectively sets a cap at which these instruments will convert into equity. For instance, if a SAFE had a $10 million valuation cap and the startup then raised a Series A round at a $20 million valuation, the price per share for the SAFE holder would be determined using the $10 million cap, rather than the price per share paid by the new investors which is determined based on the economics of the Series A round.
