Valuation cap or discount: which one applies when my SAFE converts?
When a SAFE or convertible note carries both a valuation cap and a discount, only one of them ends up applying. Whichever produces the lower price per share is the one that counts, because a lower price buys more shares for the same money. You do not need to pick between them at conversion, and neither does your investor. The document settled that when it was signed.
The two prices
Cap price is the valuation cap divided by company capitalization.
Discount price is the round's share price multiplied by one minus the discount.
Take the lower of the two.
What that looks like
A $1M SAFE with a $5M cap, on a company with 10,000,000 fully diluted shares, converting into a Series A priced at $12M pre-money.
The cap price is $5,000,000 divided by 10,000,000, so $0.50 a share. The SAFE buys 2,000,000 shares. The Series A investors pay $1.20 a share, so the same $1M buys them 833,333. The gap between the cap and the round price is what the early investor gets paid for the early risk.
Only when the document grants both
A cap-only SAFE converts at the cap price, even where the discount price would have worked out better for the holder. A discount-only SAFE has no cap to fall back on. Which terms you have is written into the instrument, so it is not something you turn on or off later.
Company capitalization is what sets the cap price, and the two standard SAFE forms define it differently, so it is worth reading your own document rather than assuming.