Educational only — not investment, legal or tax advice.
Most SAFEs come with a valuation cap, some add a discount, and some have both. These two numbers decide the price at which your SAFE investors convert into shares at your next priced round, which decides how much of the company they end up with.
The two terms
- Valuation cap: the highest valuation at which the SAFE converts. If the next round is priced above the cap, the SAFE investor converts as if the valuation were the cap, which gets them a cheaper price.
- Discount: a percentage off the next round’s share price, commonly 10% to 25%.
When a SAFE has both, the investor gets whichever gives the lower price (more shares).
Worked example
Example, hypothetical numbers, simplified to valuations rather than share prices. An investor puts $500,000 into a SAFE with a $10M cap and a 20% discount. Here is the effective valuation they convert at under three Series A outcomes.
| Series A valuation | Cap gives | Discount gives | Investor converts at |
|---|---|---|---|
| $8M | $8M (below cap, no effect) | $6.4M | $6.4M (discount wins) |
| $12.5M | $10M | $10M | $10M (equal) |
| $30M | $10M | $24M | $10M (cap wins) |
The pattern: if your next round is modest, the discount does the work. If your next round is strong, the cap does. The bigger your success, the more the cap matters.
Which to negotiate
- The cap is the term that matters most for companies expecting strong growth. It effectively sets a price ceiling for your earliest investors.
- A discount alone (no cap) is founder-friendly, because the investor’s price always moves with your next round. Investors know this and rarely accept it for early, risky rounds.
- Cap and discount together is common; just remember the investor gets the better of the two.
Model it before you sign
Use the post-money convention for the cap to see exactly how much of the company each SAFE represents. Add up all your SAFEs as if they had converted. See SAFEs and dilution and cap table basics.
From the investor’s side of the table
From the investor’s seat, the cap is how early risk gets rewarded: if the company succeeds, the earliest money should convert at a better price than later money. A fair cap reflects where the company really is today, not where the founder hopes it will be in a year.
The short version
The discount protects investors when the next round is modest. The cap protects them when it is strong. Negotiate the cap carefully; it is the term that costs you most when things go well.
Sources
Written by Fabian Cisneros. Educational only — not investment, legal or tax advice. See the full disclaimer.
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