Valuation caps and discounts: what your SAFE converts at.
A SAFE or convertible note does not set a price today. The cap and the discount decide the price it converts at when you raise a priced round.
The short answer
The cap is the highest valuation the investor converts at. The discount is a percentage off the next round's price. When a SAFE has both, the investor gets whichever gives the lower price. Caps usually matter more than discounts.
Example: a $1M SAFE on a $10M post-money cap
10% the SAFE holder owns before the priced round
Example arithmetic only. $1M divided by the $10M cap is 10%. The new round then dilutes everyone.
- Founders and existing: 90%
- SAFE holder: 10%
Compare the options
What it sets
Valuation cap: A maximum valuation for conversion
Discount: A reduction off the round price
Helps the investor when
Valuation cap: The next round is priced well above the cap
Discount: The next round is priced near or below the cap
Ownership known now
Valuation cap: Roughly, with a post-money cap
Discount: No
Common on
Valuation cap: Most SAFEs and notes
Discount: Notes, and some SAFEs
How the conversion price is picked
Say your Series A is priced at a $20M pre-money. A SAFE with a $10M cap converts as if the company were worth $10M, so the investor pays about half the new investors' price per share. A 20% discount alone would give them 80% of the round price. With both, they take the lower price, which here is the cap.
If the Series A came in at $11M instead, the cap would barely help, and the 20% discount would give the better price. That is why investors who expect a modest next round care about the discount.
Post-money vs pre-money caps
With today's post-money SAFE, the cap includes all SAFE money raised before the priced round. Each investor's stake is check divided by cap, and founders absorb the dilution when more SAFEs are added. Older pre-money caps behaved differently, so read which one you are signing.
- Is the cap post-money or pre-money?
- Is there a discount, and how big?
- Does a most-favored-nation clause apply if I offer better terms later?
- What do all my SAFEs add up to at the cap?
Terms to know
Valuation cap
The highest valuation a SAFE or note converts at.
Discount
A percentage off the price new investors pay in the next round.
MFN clause
Lets an investor take better terms you give a later SAFE holder.
Can your deck defend the cap you're asking for?
Investors compare your cap against traction, team and market. Upload your deck and we tell you where the case for your number is thin.
Questions founders ask
Can a SAFE have no cap?
Yes. An uncapped SAFE with only a discount, or an uncapped MFN SAFE, exists. Investors accept these less often because their upside is not protected.
Should I set different caps for different investors?
You can, and it is common as a round gains momentum. Keep a running total of what each cap means for your ownership before you sign more.
Sources
Sources: YC post-money SAFE user guide; standard convertible financing practice. Not legal or financial advice.
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