What is a Discount Rate?
A discount rate gives SAFE or convertible note holders the right to convert at a percentage below the next round's price per share. A 20% discount means the holder pays 80% of what Series A investors pay, receiving more shares for the same investment.
Discounts compensate early investors for taking risk before the company achieves the milestones that justify the next round's valuation.
Discount vs Valuation Cap
SAFEs often have both a cap and discount. The holder converts at whichever produces more shares. In a high-valuation round, the cap usually wins. In a lower-valuation round, the discount might produce better results.
Some SAFEs have only a discount (no cap) or only a cap (no discount).
Standard Discount Rates
15-25% is typical. Higher discounts (25-30%) might apply to very early investments or longer expected conversion timelines. Some investors prefer caps over discounts because caps provide more certainty about ownership.
Discounted Price = Round Price × (1 - Discount Rate)
Shares = Investment ÷ Discounted Price
Typical discounts: 15-25%
Your SaaS startup raises with a SAFE including 20% discount:
- SAFE investment: $250,000
- Discount: 20%
- Series A price: $2.00 per share
Discounted price: $2.00 × (1 - 0.20) = $1.60
Shares received: $250,000 ÷ $1.60 = 156,250 shares
Without discount: $250,000 ÷ $2.00 = 125,000 shares
The discount rewards early risk with 25% more shares.