A note's cap and discount compete, and only one wins

The record

Convertible notes are debt instruments startups issue before a priced round, built to convert into that later round's equity rather than being repaid in cash. Cooley GO's primer on convertible debt states “many early-stage companies use convertible debt for their initial fundraising and bridge financings” and that interest historically ran “6-10% annually,” though “it has become more common to see relatively low interest rate[s] in the 4% range” for early-stage deals. The primer describes a maturity date as the point the debt “comes due,” when noteholders can demand repayment or, in modern practice, elect to convert into stock instead.

What the sources establish

The two investor protections in most notes are a valuation cap and a discount. Cooley GO's explainer on the valuation cap describes the cap as “a ceiling on the price the note holders would be deemed to pay for the stock they get on conversion,” regardless of what a new equity investor pays. The primer states a discount typically runs “15-25%” off that new investor price, compensating noteholders for their earlier risk. Where a note carries both, the primer states they operate “in the alternative,” with whichever produces the lowest conversion price applying, so the investor gets the better of the two, never both stacked together. A worked example shows the effect at the extreme: a $3 million cap against a $10 million financing let noteholders convert as if the company were worth 70% less than the round said.

Scope and revision

These figures describe standard ranges in Cooley's own guides, not a survey of actual deals, so “15-25%” is a documented convention, not a measured average, and a given note can set a different number in its own text. The guides are living documents as retrieved on 16 September 2026, and Cooley GO separately notes convertible-debt practice varies further outside the US, including in Southeast Asia and India. Nothing here states how a cap or discount is chosen in a specific negotiation, only how the mechanics operate once a number is set.

The decision in front of you

A founder comparing a note against a SAFE, or two notes with different structures, should model the cap and discount against a plausible priced-round valuation before signing, because the “alternative” mechanic makes the investor-favorable outcome automatic, not negotiable later. This is an editorial reading, not advice: treat interest and maturity as separate risks from the conversion math, since accruing interest before conversion adds shares on top of the cap or discount.

• Does this note carry a cap, a discount, or both, and does the document say which one governs if both would apply?
• What happens at maturity if no priced round has occurred by then?
• How many shares does accrued interest add at conversion, at a plausible round size?

A cap and a discount are not decorative terms; they are the mechanism that decides how much of tomorrow's round an earlier investor's dollar actually buys, and the “alternative” rule that picks the lower price for the investor is the detail most easily missed on a first read.