The valuation cap is the maximum company valuation at which a convertible instrument (SAFE or convertible note) turns into shares at the next priced round. If the round values the company above the cap, the investor converts as if the company were worth the cap, ending up with more shares per dollar than the new money. If the round prices below the cap, the investor simply converts at the round price, or at the discounted round price when the instrument also carries a discount and that discounted price beats the cap price (the investor always converts at the lowest of the available prices).
A cap is not a valuation. Nothing has been appraised, no shares have been priced, and the company has not “raised at” the cap, even though founders and journalists routinely speak as if it had. It is a negotiated boundary that compensates the early investor for risk taken before the milestones existed. In practice the market still treats the latest cap as an anchor: the next lead will ask why the Series A pre-money should sit meaningfully above it, and the answer has to be the milestones bought with the SAFE money.
For the founder, the working arithmetic on a post-money cap is a single division: ownership sold equals amount raised divided by the cap. Keeping the cumulative result of that division across every outstanding instrument, in fully diluted terms, is the single habit that prevents the classic surprise at the first priced round.