Note: I am not a lawyer. This is my simple understanding in layman's terms.
A SAFE is an agreement between you and a company that lets you buy company stock at a specific price when a specific event occurs.
When the specified event occurs, you get company stock. The amount of stock you get is equal to the price you paid for the SAFE divided by your personal price per share. Your price per share is the same price that everyone else gets, possibly modified by a valuation cap or a discount.
The normal price per share (before modification) is equal to the total valuation of the company divided by the total number of shares that the company has. If the company is valued at $5M and it has 10,000 shares, then the price per share is $500.
A valuation cap (just cap for short) is the maximum valuation that the company can have when calculating the price. If the company valuation is $5M and the cap on your SAFE is $1M, then you get a better price. Using the example above, your price would be $1M / 10000 = $100.
A discount is exactly that - some percent off the final price. Sticking with our example, a 10% discount off the $500 price would put your price at $450
If your SAFE has both a cap and a discount, you choose which one you want to apply when you get the shares. Hint: choose whichever gives you the better price.
There are 3 possible events that can trigger a SAFE:
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Equity Financing: This is the most likely scenario. It happens when we raise money from investors by selling shares of stock. The price we sell at will establish our first real company valuation. The stock you get in this case is called preferred stock, and it's better than common stock. More on the difference below.
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Liquidity Event: this happens if the company is bought by another company or if the company has an IPO (starts being publicly traded in the stock market). In this case, you have a choice. You can either get your initial money back, or you convert your safe into an equivalent amount of common stock.
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Dissolution: this means the company ceases to exist, either voluntarily (decides to stop doing business) or involuntarily (goes under). In this case, you get your money back. If there's not enough money to pay everyone who has a stake in the company (other shareholders), you get paid before they do. But we hope it never gets to this.
Common stock is the typical type of stock you get when you buy shares on the stock market. It doesn't really give you many special privileges. Sometimes you get to vote on things and sometimes you get paid out a dividend. It's like flying coach.
Preferred stock is like flying first class. The privileges you get vary by company (sometimes you get to vote on more things, sometimes you get to veto stuff you don't like), but most importantly, you get paid before anyone with common stock gets paid. Read more about it here.