A SAFE (Simple Agreement for Future Equity) is an agreement between an investor and a company that allows the investor to invest money in the company in exchange for the right to receive equity in the future, typically in a future financing round or acquisition.
A SAFE may include a valuation cap and discount to incentivize early investment.
A valuation cap is a maximum price at which the SAFE will convert into equity in the future. If the company’s valuation in the future financing round or acquisition is higher than the valuation cap, the investor will receive equity at a lower price than other investors who did not invest at an earlier stage.
A discount is a percentage reduction in the price per share of the company’s stock when the SAFE converts to equity in the future. The discount rate is typically set at 10-20% below the price per share in the future financing round or acquisition.
The valuation cap and discount help to protect the investor’s investment and ensure that they receive a return on their investment that is commensurate with the risk they took by investing in the company at an earlier stage.