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📰 Today's topic: The 20% clause that could double your ownership

Roughly 30 to 40% of SAFEs include a discount, usually around 20%.

It's one tiny line in the deal docs. But in a down market? That clause is the difference between owning a respectable slice of a company or getting absolutely crushed when the priced round happens.

Every new angel should understand it before writing a $5k check.

What the discount does

A SAFE usually has two protections: a valuation cap and a discount. You get the better of the two when it converts. Not both.

The cap protects you if the company takes off. The discount protects you if things go sideways.

Scenario one: the company crushes it

You put $5k into a startup. $20M post-money cap, 20% discount.

A year later, they raise at $40M.

Your options:

• Convert at the $20M cap

• Convert at a 20% discount to the priced round ($32M)

Obviously, you take the $20M. In this scenario, the discount never comes into play; the cap did its job.

Scenario two: the market turns

Same $5k. Same $20M cap, 20% discount.

This time, the market cools and they raise at $10M. Ouch.

Now watch:

• Converting at the $20M cap would give you 0.025% ownership

• Converting at a 20% discount to $10M (so $8M) gives you 0.0625%

That's two and a half times more ownership for the same $5k check. All because of one clause.

Without the discount? You'd be converting above the new round's price.

Your money would buy you a smaller stake than someone writing a check that same day at the priced round. That's the nightmare.

Why founders agree to it

So it begs the question - why are (most) founders open to adding a discount clause?

Here’s the rationale investors pitch when asking for a discount:

"If you're this certain about your business, you'll give me the discount because it won't matter anyways. And if things do happen to go sideways, you should give me the discount because I took an early risk on you."

Hard to argue with that; most founders are optimists. They're betting they'll raise at a higher number anyway, so the discount feels like a free concession.

The sibling clause: MFN

Most Favored Nation (MFN) is another common clause investors will negotiate.

It says: if you issue other SAFEs at better terms before the priced round, I get those terms too.

(Harder to get than a discount. Discounts are mostly standard; MFN is negotiated separately.)

The ideal scenario? Lock in both.

The bottom line

Next time you're reviewing a deal, check for the discount.

It’s easy to gloss over when you're focused on valuation and check size. But in a choppy market, that one line can genuinely save your spot on the cap table.

What's the most interesting SAFE clause you've seen recently? Reply and let me know - I read every email.

– Brian from Angel Squad

🪽 Angel Investors come from everywhere

Spoiler alert: You don't need to be in Silicon Valley or have a trust fund to be a great angel investor.

Adebola Ogunremi | Toronto, Canada

Pharmacist (Nigeria/UK) → Canadian Real Estate Entrepreneur

Retired pharmacist with 20 years of experience in Nigeria and the UK. Relocated to Canada in 2015 and started a real estate company in 2018.

Why this matters: Adebola has worked across healthcare systems and highly regulated fields. Her adaptability and global perspective equip her to assess startups with international goals while balancing regulatory considerations.

Adebola is in our angel investing community, Angel Squad. Small Bets subscribers can grab a 30 day guest pass to join them.

Overheard in SF…probably

“Our app doesn't work yet, but it has beautiful UI/UX. Form follows function, and our form is absolutely stunning.”