How do a valuation cap and a discount work on a SAFE or convertible note?

How to answer

A discount (e.g., 20%) lets the SAFE convert at a percentage below the next round's price, rewarding early risk. A valuation cap sets a maximum valuation at which the SAFE converts, regardless of how high the priced round is — protecting early investors' upside if the company's value jumps. When both apply, the investor typically gets whichever produces the better (lower) conversion price.

Key idea: Adding the cap and discount together, or not realizing the cap usually drives conversion when the next round prices far above the cap.