Definition
Discount (Convertible)
A conversion discount lets a convertible note or SAFE convert into equity at a reduced price compared with the next round's investors.
A 20% discount means the convertible holder converts at 80% of the price paid by the new investors in the priced round, rewarding them for investing earlier and taking more risk. The discount works alongside, or instead of, a valuation cap.
When both a cap and a discount apply, the investor typically converts at whichever gives them the better (lower) effective price and therefore more shares. The discount and cap together are the levers that determine the early investor's reward.
Related terms
- SAFE NoteA SAFE (Simple Agreement for Future Equity) is an instrument by which an investor gives a startup money now in exchange for equity in a future priced round.
- Convertible NoteA convertible note is short-term debt that converts into equity at a future financing round, typically at a discount or valuation cap.
- Valuation CapA valuation cap is the maximum valuation at which a convertible note or SAFE converts into equity, protecting early investors if the startup's value soars.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.