What is a discount rate on a SAFE?
Written by For Founders Law, a Toronto firm licensed by the Law Society of Ontario. About us
Short answer
A SAFE discount lets the investor convert at a percentage below the price new investors pay in the next priced round. With a 20% discount and a round priced at $1.00 a share, the SAFE converts at $0.80. If the SAFE also has a valuation cap, the investor generally gets whichever price is lower, so the discount matters most when the round is priced below or near the cap.
How does the discount work?
The discount rate is a percentage off the price per share in your next priced round. It rewards SAFE investors for funding the company before the price was known. In Y Combinator’s SAFE, the discount is written as a “discount rate”, for example 80%, meaning the SAFE converts at 80% of the round price. That’s the same as a 20% discount.
Can you show an example?
An investor puts $100,000 on a SAFE with a 20% discount. The Series A is priced at $2.00 a share.
| New Series A investor | SAFE investor | |
|---|---|---|
| Price per share | $2.00 | $1.60 |
| Shares for $100,000 | 50,000 | 62,500 |
The SAFE investor gets 25% more shares than a new investor for the same money.
What if the SAFE has a cap too?
Then the investor typically converts at whichever price gives them more shares: the cap price or the discounted round price. Using the same $100,000:
| Scenario | Cap price | Discounted round price | Converts at |
|---|---|---|---|
| Round priced near the cap | $1.80 | $1.60 | $1.60 (discount wins) |
| Round priced far above the cap | $0.90 | $1.60 | $0.90 (cap wins) |
The discount protects the investor when the round comes in below or near the cap. The valuation cap protects them when the company’s value rises sharply. Exact mechanics depend on the SAFE form you sign.
Which SAFE forms use a discount?
Y Combinator publishes post-money forms with a valuation cap only, a discount only, or neither but with an MFN term. Y Combinator’s current post-money forms don’t combine a cap and a discount, but some SAFEs used in practice, including older pre-money forms, have both. A discount-only SAFE gives the investor no ceiling on price, so it’s more founder-friendly if the company’s value climbs quickly. Check which version you’re signing, because the forms look alike.
Is there a normal discount?
Discounts are negotiated. We won’t quote a market rate here, because it changes with the market and the deal. Model the effect on your cap table at a few round prices before agreeing a number, and consider how it stacks with earlier SAFEs. See what is dilution?
Is a SAFE discount different from a convertible note discount?
The concept is the same. A convertible note is debt, usually with interest and a maturity date, and the interest typically converts too. See SAFE or convertible note?
What’s Canada-specific?
Use a SAFE adapted for a Canadian corporation, confirm a prospectus exemption for each investor under Ontario’s Securities Act and National Instrument 45-106, and make any OSC filing within 10 days. Get tax advice on the specific form. See how do SAFEs work in Canada?
Our SAFE round work starts at $2,600. See fees.
This guide is general information about Ontario and Canadian law, not legal or financial advice for your situation. To talk through your SAFE terms, book a free 15-minute consult.