What is a discount on a SAFE or convertible note, and do I need one as well as a cap?
FundraisingEquity
A discount is a percentage off the price per share that new investors pay in your priced round. With a 20 percent discount, an investor whose SAFE converts in a round priced at $1.00 a share gets their shares at $0.80. Discounts in the 10 to 25 percent range are common, with 20 percent the number most people have in mind.
Cap, discount, or both
A cap protects the investor if the company does very well before the round, because it limits the valuation they convert at. A discount protects them if the round prices close to where the company is today, because it still gives them something for coming in early. When an instrument has both, the investor converts at whichever price gives them more shares, never a combination of the two.
The post-money SAFE is usually cap only, and that is what many seed investors accept. Arabella also carries a cap-and-discount version. Adding the discount is a concession to make, not a default to offer.
Arabella's library carries four SAFE forms: post-money cap only, post-money cap and discount, pre-money cap only, and pre-money cap and discount. The convertible note with a cap and discount is there too, each with a questionnaire that fills the terms in.
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Written by the lawyers who built Arabella. This is legal information, not legal advice for your situation, and reading it does not make us your lawyers. For a real dispute or a high-stakes decision, talk to a licensed attorney. More questions.