What Is Valuation Cap?
A valuation cap is the maximum company valuation at which an ASA (Advance Subscription Agreement) or CLN (Convertible Loan Note) will convert into shares, ensuring early investors receive equity at a favourable price even if the next round’s valuation is higher.
Valuation Cap Meaning
The valuation cap’s meaning centres on protecting early investors from excessive dilution and rewarding them for taking on higher risk. When the next funding round occurs, the valuation cap sets the upper limit used to calculate the conversion share price, often resulting in a lower price per share than new investors pay. A clear valuation cap definition helps founders understand how ASAs and CLNs will dilute the cap table and how conversion terms compare to the round’s actual valuation. For investors, the valuation cap stands for guaranteed upside if the company grows rapidly before the next priced round.
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