Conversion Discount

Quick Definition

A percentage reduction in share price that convertible investors receive when converting to equity.

What is a Conversion Discount?

A discount gives convertible note or SAFE holders a reduced price when converting. A 20% discount means they pay 80% of what Series A investors pay. It rewards early risk-taking.

Discount vs. Cap

Discounts and caps work independently. Investors get whichever produces more shares. If the cap produces a lower effective price than the discount, the cap controls.

Typical Discounts

15-25% discounts are standard. Higher discounts compensate for more risk (earlier stage, longer time to conversion). Some notes have both discount and cap; some have only one.

Formula

Discount conversion: Conversion Price = Series A Price x (1 - Discount %)

Example: Series A at $2/share, 20% discount: Conversion Price = $2 x 0.80 = $1.60/share

Example SAFE terms: $100K, 20% discount, $8M cap.

Series A: $3M at $12M post-money ($1.20/share).

Discount price: $1.20 x 0.80 = $0.96/share

Cap price: $8M / 10M shares = $0.80/share

Cap produces lower price, so SAFE converts at $0.80.

Shares: $100K / $0.80 = 125,000 shares

Related Terms

Most Favored Nation (MFN)

A provision guaranteeing an investor will receive terms at least as favorable as any subsequent investor receives.

Qualified Financing

The minimum raise amount that triggers automatic conversion of convertible notes or SAFEs.

Maturity Date

The deadline by which a convertible note must be repaid or converted to equity.