When you invest $2,200 in a startup, you get this startup's Crowd SAFE of $2,200 face value.
If the trigger event happens, the amount of cash or stock the investor gets depends on the terms of the Crowd SAFE: the discount and the valuation cap.
If both options are present, the one that gives the highest return is used.
If the company goes bankrupt, the investor will most likely lose all invested capital.
Which terms does the Crowd SAFE include?
(can be either or both)
No discount means that in the case of a liquidity event, the investor receives shares at face value.
A 20% discount means that in the case of a liquidity event, the investor will get $2,200 worth of shares 20% cheaper than face value, thus making a $550 profit.
No valuation cap or a valuation cap above the exit valuation means that in the case of a liquidity event the investor will be getting shares at market valuation.
The $20,000,000 valuation cap means that at the liquidity event, the investor will use their $500 to "buy" shares as if the company is worth $20,000,000 (instead of actual market valuation of $50,000,000 ), thus paying 2.5 times less.
The valuation cap option yields a better result,The discount option yields a better result,Both options yield the same result,
so the Crowd SAFE converts to $22,000 Because the company is valued lower than the Valuation cap,
it's better for the investor to convert the Crowd SAFE to cash,
and get their $500 back.Without the discount or valuation cap (an unlikely scenario), the result depends on the total face value of the Crowd SAFEs sold.