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What is a Discount?
In context of convertible promissory notes, a discount is a way of rewarding convertible note holders for the early stake risk associated with early stage financing. The discount allows the investor to convert the loan into shares of the company stock at a reduced price. A typical discount rate ranges from 10% to 30%. Ultimately, application of the discount means the convertible note holder can purchase more shares for the same price as compared to investors in the next qualifying round.
For more information, take a look at the hypothetical from our guide, “What is a Valuation Cap?” to get a better idea of how discounts and valuation caps interact.