Discount
A discount lets a SAFE or note holder convert at a percentage below the price the new investors pay. It sits alongside the valuation cap as a second candidate price, and the holder converts at whichever of the two gives them the better result. Only one of them applies.
Which one applies depends entirely on where the round prices, so a discount can be the whole deal or do nothing at all.
The setup
Start from the same cap table: 8,100,000 founder shares and a 900,000 option pool, 9,000,000 fully diluted.
A post-money SAFE for $600,000, with a $6,000,000 cap and a 20% discount.
The cap route. $600,000 ÷ $6,000,000 = 10.00%, which on this cap table is 1,000,000 shares at $0.60 each.
The discount route. 80% of whatever the round prices at.
Three rounds, three answers
| Round price | Discount price | Shares via discount | Which binds |
|---|---|---|---|
| $1.00 | $0.80 | 750,000 | the cap, at 1,000,000 shares |
| $0.75 | $0.60 | 1,000,000 | they tie exactly |
| $0.60 | $0.48 | 1,250,000 | the discount, at 1,250,000 shares |
At $1.00 the discount does nothing. The holder takes the cap, and the 20% written into the document has no effect on the outcome.
The crossover
The discount binds when 80% of the round price falls below the cap-implied price of $0.60:
0.80 × round price < $0.60, so the round price must be below $0.75 per share
Above that, the cap decides. Below it, the discount decides. On this cap table the cap-implied price of $0.60 corresponds to a $6,000,000 pre-money round, so the discount starts to matter when the round prices at less than 1.25 times the cap.
A discount is protection against the round pricing low. It is not an improvement on a cap in a round that prices well, because in that round it never applies.
What to check in your own documents
- Work out both candidate prices before you sign, not after. One of them is going to be irrelevant and it is worth knowing which.
- Find the crossover for your own terms. Divide the cap-implied price by one minus the discount. That is the round price at which the two swap places.
- Check whether the document says the holder gets the lower price or the better result. They come to the same thing here, but the wording is worth reading.
- A discount with no cap is a different instrument. It has no floor on the percentage, so it does not tell you what you have committed until the round prices.
Run it on your own numbers
Two candidate prices on one instrument is arithmetic you can do by hand. Two candidates each on three instruments, converting into the same round, is where the answer stops being obvious.
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