Conversion Discount

A conversion discount allows an investor who invested through a SAFE or convertible note to pay a lower price than new investors in the round in which the investment converts into shares. It is the simplest way to reward an investor who took more risk at an early stage.

Calculation

Conversion price = share price in the next round × (1 − discount rate)

Example: Suppose USD 200,000 is invested through a SAFE with a 20% discount. If new investors pay USD 10 per share in the next round, the early investor’s conversion price is USD 8. The investor receives 25,000 shares for USD 200,000, while new investors would receive 20,000 shares for the same amount.

Use with a Valuation Cap

A discount is often combined with a valuation cap. In that case, whichever gives the investor the lower price applies:

• If the next round is at a relatively low valuation, the discount is decisive,
• If the next round is at a high valuation, the cap is decisive.

Points to Watch

• The round to which the discount applies, that is, the definition of a qualified round, should be written clearly.
• How the discount works if the company is sold before conversion, for example whether a multiple of the investment is paid to the investor, should be regulated separately.
• Since shares cannot be issued below par value under Turkish law (TCC Art. 347), the discounted price must not fall below par value. The difference between the valuation and par value is recorded as share premium; see Pre-money Valuation.