Valuation Cap Calculator

Formula

To calculate the Valuation Cap:

\[ VC = PI \times (1 + r)^n \]

Where:

$VC$ is the valuation cap
$PI$ is the pre-investment value
$r$ is the annual growth rate
$n$ is the number of years

What is a Valuation Cap?

A valuation cap is a term used in startup financing that refers to the maximum valuation at which an investor is willing to invest in a company. It is often used in convertible note financing and seed rounds to protect early-stage investors from excessive dilution. If a startup’s valuation at a subsequent funding round exceeds the cap, the early investor’s stake is calculated based on the cap, not the higher valuation, thus providing them with more shares for their investment.

Example Calculation 1

Let's assume the following values:

Pre-Investment Value (PI) = \$1,000,000
Annual Growth Rate (r) = 0.10
Number of Years (n) = 5

Step 1: Use the formula:

\[ VC = 1,000,000 \times (1 + 0.10)^5 = 1,610,510 \]

Step 2: Display the result:

The valuation cap (VC) is \$1,610,510.00.

Example Calculation 2

Let's assume the following values:

Pre-Investment Value (PI) = \$500,000
Annual Growth Rate (r) = 0.15
Number of Years (n) = 3

Step 1: Use the formula:

\[ VC = 500,000 \times (1 + 0.15)^3 = 759,375 \]

Step 2: Display the result:

The valuation cap (VC) is \$759,375.00.