Discount Rate (Convertible)

TL;DR

The percentage discount a convertible note or SAFE holder receives off the next priced round's price per share.

The discount compensates the early investor for taking risk before a price was set. A 20% discount means the investor's note converts at 80% of the next round's price per share — they get more shares for the same dollars than the priced-round investors do.

Discount and cap usually work together: the investor gets the better of the two at conversion. A high cap with no discount is generous; a low cap with a steep discount is investor-friendly.

Formula

Discounted Conversion Price = Round Price per Share × (1 − Discount Rate)

• Round Price per Share — Per-share price of the qualifying priced round
• Discount Rate — The discount % offered to convertible holders for early risk (typically 15–25%)

Worked example

Note holder has a 20% discount and no cap. Series A prices at $4.00/share → discounted price $3.20/share. A $500k note converts to $500k ÷ $3.20 = 156,250 shares vs 125,000 at the round price.

Common pitfalls

• Offering both a low cap and a steep discount, doubling the founder's effective dilution.
• Forgetting that the discount applies to price per share, not company valuation.
• Negotiating the discount in isolation from the cap.

When this shows up in a pitch deck

Discount mechanics live in the data room and term sheet, not the deck.

Related terms

• Valuation Cap — The maximum company valuation at which a SAFE or convertible note will convert into equity, protecting early investors from dilution at high prices.
• Convertible Note — Short-term debt that converts into equity at a future priced round, typically with a discount, a valuation cap, and an interest rate.
• SAFE — Y Combinator's Simple Agreement for Future Equity — a contract that gives an investor the right to equity in a future priced round, with no debt or interest.
• MFN Clause — A 'Most Favored Nation' provision letting an early investor automatically adopt better terms offered to any later investor on the same instrument.
• Priced Round — A funding round where investors purchase shares at an agreed price per share, establishing a clear pre-money valuation and cap-table impact.

Use this in your next pitch deck

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