The short answer
A discount rate gives SAFE or convertible-note investors a lower share price than new investors pay when the company raises a priced round. With a 20% discount, early investors convert at 80% of the price the new investors pay.
- A discount is a percentage off the next round's share price.
- It rewards investors for taking early risk.
- Some instruments have a cap and a discount; investors get whichever gives them the lower price.
- Y Combinator's current US SAFE forms offer a discount-only version, separate from the cap-only version.
How it works
When your priced round closes, new investors buy shares at a set price per share. Holders of a discounted SAFE or note convert at that price minus the discount. Y Combinator's example: on a 20% discount SAFE, the SAFE investors get a price 20% lower than what the new investors pay. Its current US forms separate the terms into a cap-only SAFE, a discount-only SAFE and an uncapped MFN SAFE. Convertible notes often combine a cap and a discount, in which case the investor converts at whichever gives the lower price.
Worked example (hypothetical)
| New seed investor | SAFE investor, 20% discount | |
|---|---|---|
| Price per share | $2.00 | $1.60 |
| Amount invested | $100,000 | $100,000 |
| Shares received | 50,000 | 62,500 |
Same dollars, 25% more shares, because $100,000 ÷ $1.60 = 62,500.
Common mistakes
- Assuming a discount protects investors as much as a cap. In a high-priced round it doesn't, and experienced angels know it.
- Offering different discounts to different investors without tracking them. Keep every term in one cap table.
- Forgetting that a discount still dilutes you at conversion: more shares for the SAFE holder means a smaller slice for founders.
Why it matters to a pre-seed founder
A discount-only SAFE can be easier to agree on than a cap, because nobody has to name a valuation today. The trade-off: if your priced round comes in high, a discount alone gives investors less upside than a cap would, so some angels will push for a valuation cap instead. Know which version you're offering before you start pitching, and model what each converts into using our SAFE vs priced round guide.
Frequently asked questions
What discount is typical?
It's negotiated. Y Combinator uses 20% as its example on its SAFE page; your terms depend on your round and investors.
Can a SAFE have both a cap and a discount?
Y Combinator's current standard US forms are cap-only, discount-only or uncapped MFN. Convertible notes and custom SAFEs sometimes include both.
Does the discount apply to the valuation or the share price?
It's applied to the price per share in the priced round, which has the same effect as converting at a lower valuation.