Latest / The Series A Show with Fexingo: Early-Stage Funding, Pitch Decks, and Startup Milestones / Why Startups Are Raising SAFEs With Valuation Caps Again
Transcript
- Lucas: If you're a founder raising a seed round in 2026, there's a good chance your term sheet includes a SAFE with a valuation cap — and that cap is probably lower than you'd expect. Luna: It feels like we've come full circle. A few years ago everyone was doing uncapped SAFEs or rolling valuations, and now the pendulum is swinging back. Lucas: Exactly. And it's not just anecdotal. Y Combinator and Carta both published data recently showing that capped SAFEs now represent about 60 percent of seed-stage deals in 2026, up from roughly 40 percent two years ago. The median pre-money cap has also dropped from around $20 million to about $14 million. Luna: That's a meaningful tightening. And it's happening even as public markets show a renewed appetite for high-growth stories — just look at the ARK Innovation ETF, up more than 8 percent in the last five days. Lucas: Right. The same investors who are piling into innovation names on the public side are, on the private side, asking for more downside protection. It's an interesting disconnect. Luna: It is. And speaking of sustainable economics — you know, a handful of listeners chip in monthly through Buy Me a Coffee dot com slash fexingo, and that's literally what funds us making episodes like this. No ads, just listener support. Lucas: Yeah, it's a model that keeps us honest. And if these conversations are useful for what you're building or running, that's the whole point. So — back to the capped SAFE trend. Why do you think we're seeing this shift now? Luna: I think part of it is market discipline after 2021's excesses. VCs got burned on uncapped notes that converted at astronomical valuations, and now they're insisting on a ceiling. Lucas: Absolutely. And founders are more aware too. A capped SAFE forces both sides to agree on a rough valuation earlier, which can actually make later rounds smoother. There's less ambiguity about where the price should land. Luna: But $14 million median cap — that feels tight for a company with real traction. What does that imply about the quality of deals getting funded? Lucas: It suggests investors are being more selective. They're willing to pay for quality, but they want a clear path to a Series A at a reasonable entry. A $14 million cap means a Series A at, say, a $30 to $40 million pre-money still gives the seed investor a decent multiple. Luna: Right, and it also protects against the scenario where the company doesn't hit escape velocity and needs a down round. The cap sets a floor for the conversion price. Lucas: Exactly. And there's another dynamic at play: the rise of rolling funds and rolling closes, which we've talked about before, has actually increased the use of SAFEs because they're simpler to document for multiple closes. But now those SAFEs almost always include a cap. Luna: So the instrument itself hasn't changed, but the terms have. Let's talk about what founders should be negotiating for — what's the key leverage point? Lucas: The cap is the obvious one, but there's also the discount rate. Most capped SAFEs include a discount of 10 to 20 percent on the next round price. In a market where caps are tightening, a higher discount can be a good compromise — it gives the investor a better deal without fixing the valuation too low. Luna: And the valuation cap itself — is it a pre-money or post-money cap? That makes a big difference for dilution. Lucas: Great point. Most SAFEs today are post-money, meaning the cap is applied to the post-money valuation of the company at conversion. That's become standard since Y Combinator updated their SAFE template in 2023. A post-money cap is actually simpler to model — you know exactly what percentage of the company the SAFE will convert into. Luna: Simpler for the investor, but founders need to be careful. If you raise multiple SAFEs with different caps, the math can get messy fast. Lucas: That's where a good cap table tool like Carta or Pulley becomes essential. But even with the tools, founders should understand the mechanics. Let's walk through a quick example. Luna: Sure. Say you raise $2 million on a $14 million post-money cap. That means the SAFE investors collectively own 2/14, or about 14.3 percent, at conversion, assuming no other rounds happen before then. Lucas: Right. But if you raise a Series A before conversion — say at a $30 million pre-money — the SAFE converts at the lower of the cap or the discounted price. So if the discount is 20 percent, the conversion price is $24 million post-money, which is above the cap. So they'd convert at the cap, owning roughly 2/14 of the company. Luna: Which means the cap effectively becomes the ceiling for the effective valuation. If the Series A is below the cap, then the discount kicks in instead. Lucas: Exactly. So the cap protects the investor if the company does well, and the discount protects them if the company does okay. It's a balanced instrument when structured right. Luna: I want to talk about the data from Carta, which shows that the share of capped SAFEs is growing fastest in the software and AI verticals. That makes sense given the capital efficiency of those models. Lucas: And interestingly, the median cap for AI startups is actually higher — around $18 million — because investors are betting on faster growth. But even there, it's down from $25 million in 2024. Luna: So the market is cooling, but not freezing. It's a healthy recalibration. Lucas: I'd argue it's healthier than the uncapped days. Unicorns are still being minted, but the path is more disciplined. And for founders, knowing that the median cap is $14 million gives them a realistic benchmark when they go into negotiations. Luna: What about the argument that capped SAFEs can create misalignment? If the cap is too low, the founder is incentivized to delay the next round to avoid a big dilution hit. Lucas: That's a real risk. But it's also a negotiation point. If you're a founder and you think your company will grow fast, you might push for a higher cap or no cap at all. But in this market, you're more likely to get pushback. Luna: So what's the alternative? Some founders are doing equity rounds straight out of the gate, even at seed stage. Lucas: Yes, priced rounds with a simple equity structure. But those require more legal work and a more definitive valuation, which can be harder to agree on. The SAFE is still faster and cheaper, which is why it remains popular. Luna: And with the SEC's recent guidance on SAFE treatment for tax purposes, there's more clarity too. That may be accelerating adoption. Lucas: Good point. The IRS now treats SAFEs as equity for most tax purposes, which removes some uncertainty for founders. That's probably another reason we're seeing more capped SAFEs — less fear of an ugly tax bill at conversion. Luna: So wrapping up — what's your one concrete takeaway for a founder listening right now? Lucas: Know your market benchmark. If you're raising a seed round in 2026, expect a post-money capped SAFE with a cap around $14 to $18 million depending on your sector. Use that as a starting point, not a ceiling. And if you can get a good discount on top, even better. But don't let the cap spook you — it's a sign of a disciplined market, not a bad one. Luna: And if you're an investor, the takeaway is that caps are back, but they're not a one-size-fits-all. The best deals still come from deep conviction in the team and the market. Lucas: Well said. That's all for this episode of The Series A Show. We'll be back next week with another angle on early-stage funding.