Discount rate (SAFE/note)

How the discount works at conversion

The discount converts a SAFE or note at a price below the priced-round price. The math:

1. The priced round closes at a share price of P (for example, $1.00 per share).
2. The SAFE or note converts at P × (1 − discount). At a 20% discount, the conversion price is $0.80.
3. The investor's principal (and accrued interest, for notes) is divided by the conversion price to determine shares received. $200,000 / $0.80 = 250,000 shares, vs. $200,000 / $1.00 = 200,000 shares without the discount.
4. The 50,000-share difference is the discount benefit to the early investor.

Cap vs. discount, in practice

When a SAFE or note has both a cap and a discount, conversion runs both calculations and uses whichever produces the lower conversion price (more shares for the investor). The pattern by priced-round valuation:

• If the priced round is at or below the cap: the discount is typically the better outcome.
• If the priced round is above the cap: the cap is typically the better outcome.
• The crossover happens at a valuation roughly equal to cap ÷ (1 − discount). At a $5M cap and 20% discount, the crossover is around $6.25M pre-money.

When the discount stands alone

Discount-only SAFEs are less common today than they were before post-money SAFEs were introduced in 2018, but they still appear in:

• Bridge rounds between two priced rounds where the cap is not the right conceptual fit
• Friends-and-family deals where the discount is a simple way to recognize the early risk
• Strategic or commercial deals where the discount is incidental and not the main negotiation