Discount Rate (Convertible)

The discount rate on a convertible note or SAFE gives the early investor a built-in price break when the instrument converts into equity at the next priced round. A 20% discount means the holder converts at 80% of the new investors’ price per share.

The discount compensates early backers for taking risk before a valuation is set. Where an instrument has both a discount and a valuation cap, conversion usually applies whichever gives the investor the lower (more favorable) price.