Full Definition
In the context of startup fundraising, a discount rate is the percentage discount that SAFE or convertible note holders receive when their investment converts to equity in the next priced round. It rewards early investors for taking on more risk by giving them shares at a lower price than new investors pay.
Typical Discount Rates
- Standard: 15-25% discount
- Most common: 20% discount
- Higher risk (very early stage): 25-30%
How It Works
If the next round prices shares at $10/share and the SAFE has a 20% discount, the SAFE holder converts at $8/share (20% less), getting 25% more shares for the same investment amount.
Cap vs Discount
When a SAFE or convertible note has both a cap and a discount, the investor gets whichever method results in a lower conversion price (more shares). In practice, the cap is usually more favorable for early-stage deals that see significant valuation increases.
Real-World Example
A convertible note with a 20% discount converts at $8/share when Series A prices at $10/share, giving the note holder 25% more shares per dollar invested.
Related Terms
A Y Combinator-created investment instrument that converts to equity in a future priced round.
A short-term debt instrument that converts into equity during a future financing round.
The maximum company valuation at which a SAFE or convertible note converts to equity.
The value of a company before receiving new investment in a funding round.
The first significant round of funding for a startup, typically used to build an MVP and validate market fit.
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