What is discount in convertible note?

What is discount in convertible note?

A discount in a note sets a percentage reduction at which the convertible note will convert relative to the next qualified priced round. Discounts range from 0\% to as high as 35\% with 20\% being common.

What is convertibility discount?

Your convertible note holders have a 20\% discount, so they get to convert into the next round at a valuation of 2.4M. with the use of a cap, an investor can effectively set the minimum amount of equity an investor is willing to own as part of having participated in your convertible note round.

How does a discount work on a safe note?

The Discount Rate is defined at the top of the SAFE, and usually something like 80\%. If the startup’s valuation at the Series A is lower than the Valuation Cap, the Safe Investors will be paying for their Series A shares at the Discount Price (the Series A price multiples by Discount Rate).

What is a note discount rate?

The discount rate is a term in a Convertible Note or SAFE that gives investors a reduced price to that paid by the Series A investors. Note that discount rates usually are only applied when the valuation is below the Valuation Cap.

What is a typical safe discount?

Because the SAFE comes before any investor later on, the SAFE investor might want the SAFE to convert to equity at a discount to the later round of financing. Discounts typically range from 10–30\%. Instead of buying shares at $1.00, the SAFE holder gets to buy shares at $0.50.

Are convertible notes included in fully diluted?

Notwithstanding the foregoing, “Fully Diluted Capitalization” excludes: (A) any convertible promissory notes (including this Note) issued by the Company; (B) any SAFEs (as defined below) issued by the Company; and (C) any Equity Securities that are issuable upon conversion of any outstanding convertible promissory …

What is a typical SAFE discount?

What is a discount rate in SAFE?

Investor has purchased a safe for $100,000. The company will issue Series A-1 Preferred to the safe holder, based on the Valuation Cap or the Discount Rate, whichever results in a lower price per share. The 15\% discount applied to the per share price of the Series A Preferred is $0.77265.

How is the discount rate determined?

How to calculate discount rate. There are two primary discount rate formulas – the weighted average cost of capital (WACC) and adjusted present value (APV). The WACC discount formula is: WACC = E/V x Ce + D/V x Cd x (1-T), and the APV discount formula is: APV = NPV + PV of the impact of financing.

What does a ‘discount’ mean in a convertible note?

Convertible Note Terms Interest Rate. Investors receive a premium on the capital they invest in the form of interest. Discount Rate. The discount rate offers investors an opportunity to purchase equity at a reduced price, typically 10\% to 20\% below face value. Valuation Cap. Maturity Date.

Do convertible notes have both CAP and discount?

Convertible notes have an interest rate, discount rate, valuation cap, and a maturity date. Investors need not use all the terms and typically select either an interest or discount rate and may forgo a valuation cap.

When to issue convertible notes?

Convertible Note: A convertible note is issued to investors, typically in the very early stages of a company, in exchange for stock at a later time. Convertible notes also carry a unique characteristic among investments.

What are typical convertible debt note terms?

Five Need-to-Know Key Convertible Note Terms // Maturity Date. In order for the debt an investor purchases to turn into a tangible benefit, the debt must convert into equity. Qualified Financing Event. The second and more common means of triggering a conversion is through a Qualified Financing Event (QFE). Liquidation Preference.