# Discount Rate (SAFE/Note)

## Quick Definition

A percentage reduction on the next round's share price for SAFE or convertible note holders, rewarding early risk.

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## What is a Discount Rate?

A discount rate gives SAFE or convertible note holders the right to convert at a percentage below the next round's price per share. A 20% discount means the holder pays 80% of what Series A investors pay, receiving more shares for the same investment.

Discounts compensate early investors for taking risk before the company achieves the milestones that justify the next round's valuation.

## Discount vs Valuation Cap

SAFEs often have both a cap and discount. The holder converts at whichever produces more shares. In a high-valuation round, the cap usually wins. In a lower-valuation round, the discount might produce better results.

Some SAFEs have only a discount (no cap) or only a cap (no discount).

## Standard Discount Rates

15-25% is typical. Higher discounts (25-30%) might apply to very early investments or longer expected conversion timelines. Some investors prefer caps over discounts because caps provide more certainty about ownership.

## Formula

Discounted Price = Round Price × (1 - Discount Rate)

Shares = Investment ÷ Discounted Price

Typical discounts: 15-25%

## Example

Your SaaS startup raises with a SAFE including 20% discount:

- SAFE investment: $250,000
- Discount: 20%
- Series A price: $2.00 per share

Discounted price: $2.00 × (1 - 0.20) = $1.60

Shares received: $250,000 ÷ $1.60 = 156,250 shares

Without discount: $250,000 ÷ $2.00 = 125,000 shares

The discount rewards early risk with 25% more shares.

## Related Terms

[**SAFE (Simple Agreement for Future Equity)**  
An investment agreement that converts to equity in a future funding round, featuring a valuation cap and/or discount without debt terms.  
Learn more](/content/terms/safe-simple-agreement-future-equity/index.html)

[**Convertible Note**  
A debt instrument that converts to equity in a future funding round, featuring interest accrual and a maturity date.  
Learn more](/content/terms/convertible-note/index.html)

[**Valuation Cap**  
The maximum valuation at which a SAFE or convertible note converts to equity, protecting early investors from excessive dilution.  
Learn more](/content/terms/valuation-cap/index.html)