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Comment by sebmellen | Hacker News Reader

Very high level explanation of a SAFE is that it converts on the valuation of your next funding round. Uncapped means that if you raise at a $200m valuation in one year, the SAFE will convert to equity at 250k/200m or 0.125% of the company.

More details here https://capbase.com/how-do-safes-work/.

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> Uncapped means that if you raise at a $200m valuation in one year, the SAFE will convert to equity at 250k/200m or 0.125% of the company.

How would it be different if it was capped? I went to your link but there are no mentioned of "capped" or "uncapped"

How it matters to the founder - if it's uncapped then as the next round goes to infinity, the equity from the SAFE round goes to zero (see the 200MM example). If It's capped, then the SAFE will convert at no lower than X%.

Uncapped is better for the founder, but the difference only will ever really matter if it takes off so fast that the next round is at a much higher valuation than expected.

If it is capped then you replace “200m” by the minimum of “200m” and some agreed on amount, e.g., 10m. This protects the investor in case the first equity round has a surprisingly high valuation, which would dramatically dilute them. At the same time, instead of agreeing on a valuation for the initial investment, you are agreeing on a theoretical upper bound on the current valuation.

Capped means the investor is putting in a floor for the minimum stake they’ll accept in the next round. So regardless of next funding round they would get own (original investment)/(new valuation with maximum value of cap) = % of company owned. Uncapped means the denominator will be whatever new valuation is.

Cap sets a valuation cap, say $20M, and the safe converts to equity at the lesser of the cap and the valuation of the later round.

So if you raised 500k, they would get 50% of the company?

If you raised at a $500k valuation, yes. Not if you just raised $500k.

Okay, so that is what “uncapped” refers to here — there is no cap on how much of an ownership stake the investor can translate to.

That contract seems like a really bad deal unless you’re certain to be raising a lot of money & need capital to cross some barrier to get there.

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