A convertible note discount is one of the main economic levers in a convertible promissory note. Notes typically do not include a stated pre-money valuation. Instead, the note converts into equity in a later priced financing (often a Series A), and the conversion price is usually based on the price paid by new investors in that round, adjusted by any agreed conversion discount (and sometimes a valuation cap).
The conversion discount is meant to reward the seed investor for taking earlier risk. When the note converts, the investor effectively pays a lower price per share than the new money investors in the priced round, because the conversion price is reduced by the discount.
How a convertible note discount works
Example: If the Series A price is \$1.00 per share and the note has a 20% conversion discount, the note converts at \$0.80 per share. That means the noteholder receives 25% more shares for the same principal and accrued interest than they would at the Series A price.
Conversion discounts are set to approximate the additional risk the note investor is taking by investing earlier than the priced-round investors. In addition to general early-stage risk, the discount is often influenced by timing (how long until the next round), how quickly the company expects its valuation to increase, and market norms for similar deals.
Common convertible note discount ranges
Many convertible note deals use a fixed convertible note discount, often somewhere between 10% and 40%. In practice, 15% to 25% is common in many seed financings, with higher discounts usually reflecting either higher perceived risk or a longer expected time to the next priced round.
Time-based step-ups
Sometimes the discount increases over time, which can motivate the company to raise the next round sooner and compensate the investor if the conversion takes longer than expected. If you use this approach, be careful that the tiers are simple to administer and do not create surprises in the cap table model.
Example tiered discount:
(i) 15% if the Series A occurs within 6 months after the note investment;
(ii) 25% if the Series A occurs within 7 to 12 months after the note investment; or
(iii) 40% if the Series A occurs 12 or more months after the note investment.
Founder considerations
If your note also has a valuation cap, the conversion mechanics typically give the investor the benefit of the better price, meaning the lower of the discounted price or the cap-based price. Founders should model both scenarios, because the cap can drive the outcome even when the discount looks modest.
Also watch for term creep across multiple note closings. If you issue notes over time with different discounts, caps, or most favored nation rights, the conversion math and investor expectations can get messy. A clean term sheet, a single note form, and a simple model you can share with counsel will save time later.
If you keep the terms simple and model a few outcomes in advance, a convertible note discount can be an efficient way to reward early risk without debating a valuation too early. The key is to pick a number you can explain, document it consistently across closings, and avoid adding complexity you cannot administer.
FAQ for founders
Q: Is a conversion discount the same thing as a valuation cap?
No. A discount reduces the priced-round share price by a percentage. A valuation cap sets a maximum company valuation for conversion math. Notes sometimes include one or both, and if they include both, the investor typically converts at the better price.
Q: What convertible note discount should we offer?
Many seed notes land in the 15% to 25% range, but there is no universal right answer. The right number depends on your leverage, the round timeline, whether there is also a cap, and what similar companies are offering in your market. Example: If you expect to raise a priced round in 6 to 9 months and you have strong demand, 15% to 20% may be sufficient. If the timeline is uncertain, you may see pressure for 25% or more.
Q: We are doing multiple note closings. Do early investors need a better discount?
Not necessarily, but you should be intentional. Some companies keep terms identical for simplicity. Others use a small step-up over time to reflect added risk for earlier checks. Either way, document it clearly so investors understand whether later investors are getting the same deal or a different one.
Q: What happens if we never do a priced round?
The note terms govern. Some notes convert upon a defined event, may be repayable at maturity, or may allow conversion in a change of control. Make sure you understand maturity date, interest, and any conversion triggers so you are not forced into a bad outcome later. Example: A 24-month maturity note that has not converted could become due and payable, which is a problem if the company does not have cash to repay it.
Ryan RobertsStartup Lawyer
Ryan Roberts is a startup lawyer at Roberts Zimmerman PLLC with more than two decades of experience advising startups and venture capital investors. He is the author of “Acceleration” and StartupLawyer.com.
