Discount (Convertible)

Rewarding early risk

When an early investor backs a startup before it has a clear valuation, they take on more risk than those who come in later with more information. A conversion discount rewards that risk. The investor's money goes in as a convertible instrument — a note or similar — that later converts into equity at a reduced price compared with the investors in the next priced funding round. A 20% discount means the early backer's money buys shares at 80% of what the next round pays, getting more equity per rupee.

How it works in India

Indian startups typically use discounts of 10% to 25%, often combined with a valuation cap (a ceiling on the price at which the money converts). The structure matters because the US-style SAFE is not legally recognised under India's Companies Act and FEMA. Instead, Indian founders use the iSAFE (structured as compulsorily convertible preference shares) or the two workhorse instruments — compulsorily convertible debentures (CCDs) and compulsorily convertible preference shares (CCPS): "money today, equity tomorrow."

There is also the convertible note, a special carve-out available only to DPIIT-recognised startups, with a minimum investment of ₹25 lakh per investor and a requirement to convert (or repay) within up to ten years. For foreign investors, FEMA pricing rules apply at the point of *conversion*.

A worked example

Suppose an angel invests ₹50 lakh through a CCPS-structured iSAFE carrying a 20% discount and a ₹50 crore valuation cap. When the startup raises a Series A at a ₹100 crore valuation, the cap kicks in: the angel converts at the ₹50 crore cap price — buying far more shares per rupee than the new Series A investors paying full price. The discount and cap together reward the angel for backing the company when it was riskier and less proven.

Why it matters

For founders and early investors alike, the conversion discount is a core term in seed-stage deals. It lets a startup raise quick early money without fixing a valuation prematurely, while fairly compensating early backers for their risk. Understanding the discount, the cap and the Indian legal wrappers (CCPS, CCD, convertible note) is essential to reading any early-stage term sheet — because these terms quietly determine who ends up owning how much of the company.