Fundraising · Venture capital

Should I provide incentives for investors to invest higher amounts via a tiered discount rate?

Sean Greene CEO & Founder, Bambino

January 13th, 2016

I'm currently raising money using the SAFE mechanism developed by Y Combinator. It's been going well, but I have a potential investor that has posed an interesting question. He has asked for an increased discount rate for investing over a certain level. In other words, using made up numbers, let's say my minimum investment threshold is $5k. For that, I'm offering a discount of say 10% applied against a future equity round. The investor in question has offered to invest $25k, but wants a discount rate of 12%. Should I do it, or does that muddy up anything in the future?
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Jessica Alter Entrepreneur & Advisor

January 13th, 2016

I've done it but not for a certain amount, only for investors who get in early.  In other words, after you raise first $xooK the discount rate goes up. Helps create urgency and since no one likes to be the first check it rewards them for that.

Peter Weiss President at American Outlook, Inc.

January 13th, 2016

First, you're dealing in very small numbers.  I'd never change terms for a $25,000 investment.  

Second, if you are offering a tiered investment you need to disclose that to all investors.  If you introduce one later on you have changed the terms of the offering and need the consent of all prior investors (and need to disclose it to all later investors in the round).  If anyone doesn't consent you can't move forward or you need to give them their money back.  This is securities offering 101.


Peter Weiss President at American Outlook, Inc.

January 13th, 2016

Complexity = trouble.

Find someone who understands finance, investors and capital structure.  Listen carefully.  If they've been doing if for a long time assume they know more than you do even if you don't like their advice.

I always test the pitch and the offering on friendly but critical acquaintances.  If we get pushback we adjust the terms.  Once the terms are set if someone asks for adjustments there are only two good answers:  (1) No, we've tested what we're asking and believe it's reasonable and appropriate to the market or (2) How much are you willing to invest?  If the answer to number 2 is not a very big slice of the total raise see answer number 1.  

As an investor, when a company raising money is willing to play with their terms for relatively small amounts of capital I think one of two things:  either they haven't thought through what they're doing or they are lousy negotiators and they will not do well in front of a tough customer.  Respect yourself and your business enough to think carefully about what it's worth and how to structure an ask and respect your potential investors enough to give them a solid, reasonable, no BS offer. 

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

January 13th, 2016

Understand that there are legal consequences to issuing stock incorrectly. Don't make judgements about the investors. Money is money and the rules are the rules. There are variables that need to be considered including the size of your offering, how many states investors may live in and what exemptions  your shares are issued under.  Call your lawyer.   . 

Jor ✓ Co-Founder at Verify Investor, LLC

January 13th, 2016

If you have no prohibitions preventing you from increasing the discount rate for one investor over another, if you take into account all investors who might have a "most favored nation" clause that entitles them to equal treatment, and if you have properly disclosed that you might treat different investors differently (or give subsequent disclosure along with the right to rescind or give everyone the same deal along with the right to rescind), and you don't think there will be political ramifications from your doing so, then you could probably provide the additional discount without muddying too much in the future.  As others have indicated, it's best to check with your attorney on this.  However, as others have also pointed out, it doesn't seem to be worth doing this for a $25k investor unless they are really that important (for example, if they are $25k of a $50k round and have a strong network).


Peter Weiss President at American Outlook, Inc.

January 14th, 2016

Sean, answering your specific last question, I've found multi-tier deals rarely work the way you hope.

The bigger fish who may not want to hit your threshold often push for it at half or three quarters of the step.  The smaller fish often hold out or try to band together, formally or informally, adding complication and distraction to the fundraising process.  If you discount through price you have to figure out what that means for liquidation preferences. (Is the pref at the list price or the discounted price?  If I'm a whale I don't want the minnows to have a $1.00 per share pref when I get $0.80 per share.)  Warrants often effect later rounds because they are a dilution overhang (but have not generated capital).

Similar issues apply on the "invest early, get a bonus" approach, whether it's a lower price (gee, what happened since last week that your shares are worth 20% more?) or warrants (same issue plus the dilution overhang).  

Have fun - it's a common challenge when negotiating for capital.

Carole Bellis Partner, Kilpatrick Townsend

January 17th, 2016

Hi Sean, having multiple discount rates is going to make your conversion of the notes into equity pretty challenging. You would typically want your note investors to convert into common stock having an original issue price equal to the price at which they convert in. That generally requires setting up a separate class of preferred stock with that conversion price. You would not want to have to authorize multiple series of preferred stock to cover various different discount rates. Carole Bellis Kilpatrick Townsend & Stockton LLP 1080 Marsh Rd. Menlo Park, CA 94025 (650) 462-5313

Sean Greene CEO & Founder, Bambino

January 14th, 2016

Thank you all for the advice. I've found it useful in thinking through my particular situation. As stated in my post, I'm using Y Combinator's Safe agreement as my fundraising mechanism. If you're unfamiliar with it, the Safe is similar to convertible debt. 

As far as the amounts I'm raising, the numbers in my question are made up as I stated. The investment amounts in question are significantly higher. At this stage, I'm likely to refrain from modifying the terms and it's without question that I will talk to my attorney, but I do like the concept of providing a higher discount rate for a higher level of investment. I do not have any MFN clauses and my investors are all friendlies. I would make the same offer to all of them. I was just wondering if anyone had any experience with escalating discount rates for increased levels of investment in the same round. 

Peter Weiss President at American Outlook, Inc.

January 14th, 2016

Thanks for the compliment. P Peter H. Weiss President, American Outlook, Inc. Providing Financial Consulting and CFO Services P.O. Box 1682 Mercer Island, WA 98040 206-890-4792 Fax 206-493-2800 pweiss78@alumni.princeton.edu

Andrew Lockley

January 14th, 2016

You should only discount for investors who offer additional value eg advisory services