Understanding SAFE Notes with Different Valuation Caps and Discounts

SAFE notes have become the default funding instrument for many early-stage startups—but not all SAFEs are created equal. Terms like valuation caps and discounts significantly affect investor upside and conversion outcomes. Yet many angel investors fail to fully grasp how these terms play out in practice.

This blog breaks down how SAFE notes work, what valuation caps and discounts really mean, and how to evaluate them with clarity and confidence.

What Is a SAFE Note?

SAFE stands for "Simple Agreement for Future Equity." It is a flexible investment instrument introduced by Y Combinator that allows investors to fund a startup now in exchange for equity at a future priced round.

Unlike traditional convertible notes, SAFEs do not accrue interest or have a maturity date. Instead, they convert into equity when the startup raises a priced round, based on pre-negotiated terms.

Key SAFE Terms: Valuation Cap and Discount

Valuation Cap

This is the maximum valuation at which your SAFE will convert into equity, regardless of the valuation of the next priced round.

Example: If the priced round is at a $10M valuation but your SAFE cap is $5M, your investment converts as if the valuation were $5M, giving you more equity.

Discount

This gives the investor a percentage discount on the valuation at which the SAFE converts, typically between 10%–25%.

Example: If the priced round is at $8M and your SAFE includes a 20% discount, your investment converts as if the valuation were $6.4M.

Both Terms Present

Most SAFEs include both a cap and a discount. At conversion, the investor gets the more favorable term.

Why These Terms Matter

• Ownership Impact: Lower caps mean more equity for the same check size.

• Investor Protection: Caps and discounts reward early risk by ensuring better pricing.

• Signal of Market Power: Negotiated caps reflect founder leverage and investor competition.

• Future Dilution: Higher conversion equity reduces dilution from later rounds.

Questions Investors Should Ask

• What valuation cap are you offering, and how was it determined?

• Is there a discount, and what is the conversion trigger?

• How much capital are you raising on this SAFE?

• Are there multiple SAFEs with different terms?

• How will the cap impact ownership if the priced round happens at X valuation?

These questions help uncover potential dilution and clarify investor alignment.

Conversion Math in Action

Let’s say you invest $100K in a SAFE with:

• Valuation cap: $5M

• Discount: 20%

• Priced round: $10M

You get the better of:

• $5M cap = 2% equity ($100K / $5M)

• 20% discount = $100K / $8M = 1.25% equity

In this case, your SAFE converts at the cap for more favorable equity.

Raziel lets investors model SAFE conversions across different pricing scenarios. With Raziel, you can:

• Track SAFE terms across deals

• Simulate ownership outcomes at different priced round valuations

• Compare return multiples based on cap/discount structures

• Tag startups with multiple SAFEs and assess blended dilution impact

This helps early-stage investors quantify what they are actually getting—not just what is on the term sheet.

Know What You Are Signing Up For

SAFEs are simple in name, but nuanced in impact. Caps and discounts shape how much of the company you actually own when it counts.

Smart investors understand these terms in context—both of market conditions and portfolio strategy. With the right tools, SAFE investing becomes less speculative and more strategic.

With Raziel, investors can bring clarity to early-stage terms and manage conversion scenarios with confidence.