Discount Rate
A percentage discount SAFE or note investors receive on the share price in the next round.
Definition
The discount rate gives SAFE or convertible note holders the right to convert at a lower price per share than what new investors pay in the next priced round. A typical discount is 15-25%. The discount rewards early investors for taking on more risk by investing before the priced round. If the instrument also has a valuation cap, the investor converts at whichever method gives them a better (lower) price.
Why it matters
Discounts mean early investors get more shares per dollar than the new round investors, which means slightly more dilution for common holders. When evaluating your dilution, account for the extra shares created by discount conversions.
Example
A SAFE has a 20% discount. The Series A prices at $5/share. The SAFE investor converts at $4/share (20% discount). Their $100K investment buys 25,000 shares instead of 20,000, creating 5,000 extra shares of dilution.