Price & valuation
Discount rate
Also called Conversion discount
A percentage reduction — typically 10% to 25% — applied to the price per share of the next priced round when your SAFE or note converts.
In plain English
The discount is the simpler of the two conversion mechanics. If the priced round is at $2.00 per share and you hold a note with a 20% discount, you convert at $1.60 and receive 25% more shares for the same money. It is a fixed reward for having invested earlier, expressed as a percentage rather than a ceiling.
Discounts are usually stated as the discount itself — "20% discount" — but occasionally as the conversion percentage — "80% of the round price". These mean the same thing, and confusing them is a common and expensive reading error. Twenty per cent off is not the same as converting at 20%.
Where a note or SAFE has both a cap and a discount, they are alternatives rather than additions. You convert at whichever produces the lower price per share, which means whichever gives you more shares. The document should say this explicitly; if it says only that the discount applies, the cap may be decorative.
The discount matters most when the next round arrives soon and at a modest step-up. In that scenario the cap may never bind and the discount is all the compensation you get for the risk you took. It matters least in the outcome you actually want — a large step-up — where the cap does all the work.
What it means for your cheque
A discount alone is weak protection. Twenty per cent off a price that has tripled is still more than twice what the previous round paid, so a discount-only instrument leaves you paying near-current prices for early-stage risk. Treat a discount as a supplement to a cap, never a substitute.
The one situation where a discount-only structure is defensible is a short bridge into a round that is already substantially agreed. If the priced round is weeks away and its price is broadly known, there is little uncertainty to protect against and a discount fairly compensates the few months of extra risk.
Do the arithmetic
Cap versus discount on the same $30,000
You hold a $30,000 SAFE with a $6m cap and a 20% discount. Two scenarios for the next round.
| Scenario 1 — next round at $8m pre-money | |
|---|---|
| Price under the discount | 80% of $8m = an effective $6.4m |
| Price under the cap | $6m — the cap wins, marginally |
| Your stake | $30,000 ÷ $6m = 0.50% |
| Scenario 2 — next round at $25m pre-money | |
| Price under the discount | 80% of $25m = an effective $20m |
| Price under the cap | $6m — the cap wins decisively |
| Your stake with the cap | 0.50%, versus 0.15% on the discount alone |
In the modest scenario the two mechanics are nearly equivalent. In the good scenario the cap is worth more than three times the discount — which is precisely the scenario you invested for.
At the table
What to negotiate
- Get the document to say you convert at the lower of the capped price and the discounted price. Ambiguity here is resolved against you.
- Check whether the discount applies to accrued interest as well as principal on a note. It should.
- Confirm whether "20% discount" means 20% off or conversion at 20% — read the definition rather than the summary.
- Ask whether the discount applies on an acquisition as well as a priced round. Many do not, which is a meaningful gap.
- Twenty per cent is the market standard. Below 15% on a genuinely early cheque is thin.
Discount rate: common questions
Do the cap and the discount stack?
What is a standard discount?
Does the discount apply if the company is acquired before converting?
Keep reading