What is a Conversion Discount?
A discount gives convertible note or SAFE holders a reduced price when converting. A 20% discount means they pay 80% of what Series A investors pay. It rewards early risk-taking.
Discount vs. Cap
Discounts and caps work independently. Investors get whichever produces more shares. If the cap produces a lower effective price than the discount, the cap controls.
Typical Discounts
15-25% discounts are standard. Higher discounts compensate for more risk (earlier stage, longer time to conversion). Some notes have both discount and cap; some have only one.
Formula
Discount conversion:
Conversion Price = Series A Price x (1 - Discount %)
Example: Series A at $2/share, 20% discount:
Conversion Price = $2 x 0.80 = $1.60/share
Example
SAFE terms: $100K, 20% discount, $8M cap.
Series A: $3M at $12M post-money ($1.20/share).
Discount price: $1.20 x 0.80 = $0.96/share
Cap price: $8M / 10M shares = $0.80/share
Cap produces lower price, so SAFE converts at $0.80.
Shares: $100K / $0.80 = 125,000 shares