LEGAL
Raising Capital
Valuation Caps & Discounts in SAFEs: How They Work and What They Mean
Valuation caps and discounts are terms that determine how much equity investors receive when their SAFE converts. They balance risk and reward in early-stage investing and significantly affect founder dilution.
Why it Matters
Valuation caps and discounts determine how much equity your SAFE investors get when their investment converts.
If you don’t understand them, you could accidentally over-dilute yourself or mislead investors.
Founders Checklist
Decide whether your SAFE includes a valuation cap, discount, or both
Be transparent with investors about the conversion mechanics
Model how much equity each SAFE investor will get at different Series A valuations
Track all SAFE terms carefully in your cap table tool
Use standard templates to avoid hidden complexity
Founder Fails
Raised multiple SAFEs with wildly different terms > cap table chaos
Forgot to model conversion scenarios > unexpected dilution
Promised “same terms” to investors but didn’t standardize SAFEs
When to ask for Help
Before setting a valuation cap or offering a discount
If issuing SAFEs with different terms to multiple investors
To understand how caps affect ownership at the priced round
When modeling conversion scenarios and dilution
If negotiating caps with strategic or lead investors
Frequently Asked Questions
Q: What is a valuation cap?
A: It sets the maximum valuation at which a SAFE investor’s money converts to equity — even if your priced round is at a higher valuation. It’s a way to reward early risk.
Q: What’s a discount in a SAFE?
A: A discount (usually 10–20%) gives the investor a lower price per share than new investors in your next round. It’s an alternate way to reward early checks.
Q: Can I use both a cap and a discount?
A: Yes. In that case, the investor gets the better of the two (more favorable conversion).
Q: What happens if I raise with no cap or discount?
A: You’re giving away less — but many investors will push back, especially at early stages. SAFEs without caps are seen as less investor-friendly.