Post-money valuation cap
This is the maximum valuation you’ll pay for the equity, regardless of how much money other investors put in.
Example: $1M invested on a $10M post-money SAFE will result in you buying 10% of the company.
Discount
The price you pay for the company’s equity will be calculated as a discount off of their first priced equity round.
Example: If the SAFE specifies a 20% discount and the company raises a priced equity round at a $15M valuation, you will be buying equity at a $12M valuation (20% discount from $15M).
The cool thing?
SAFEs may have one or both of these terms. If both, you will get the LOWER of the two. The goal is to reward early investors. In the examples we just cited, the $10M valuation cap wins.
Two logical questions
Since a SAFE converts to equity at a priced round, it’s fair to ask: “What if the founder never raises money again?” SAFEs automatically convert to equity at the valuation cap if the company has an exit event (acquisition, shut-down, IPO).
The next logical question is: What’s a “good” post-money valuation cap for an early-stage startup? It’s also a harder question. We’ll get to that later.