Not really. If a fair price for your company is $10m today or $40m in a year if you do well, there isn't a good reason to invest at $40m today (or even a discount like 20% off $40m).
An analogy: Amazon is $1k/share today. Let's say you think there's a 30% chance it will 3x in the next year. Would you like to invest at $2.5k/share today? The answer is No because that has negative expected value, and you'd rather just wait a year and invest at $3k/share than investing at a small discount to $3k/share today when the stock is worth much less than that.
Also, the time horizon doesn't change the misaligned incentives here. Because I get in at next round's price, I would prefer for that price to be lower.
It seems like a hidden element that we aren't talking about which really might affect everyone's reference points is the time duration between SAFE and priced rounds.
For a lot of people, I see the difference being the start of the process, and the end of process which can be a few months - in which case, an uncapped with discount seems entirely reasonable.
It seems like you are referring to a case where a substantial time has passed to materially affect the valuation in a substantive way?
Isn't the whole point of notes to address the uncertainty of valuation? In your example, what happens when there's no 'fair price today'? If you think there's a 30% chance Amazon will be worth 3k in a year, what price would you pay now?
Usually fair price is based on some combination of 1) market price and 2) the investment's expected value, adjusted by some return hurdle rate. For example, if I'm looking for a 25% annual return, and next year I think Amazon is 70% likely to be $1000/share and 30% likely to be $3000/share (weighted avg = $1600/share), then a fair price might be $1280.
the point of notes is to be able to raise without expensive legal fees and be reasonable on valuation (i've done a lot of angel investing and when i invest i want a "starting point" - doesn't have to be crazy low but has to "make sense" - at least to me; 20% discount on next round isn't appealing enough {why would an angel putting money super early with the greatest chance of losing it all only get a relatively small discount})
Ease and simplicity is definitely the biggest reason notes have continued to be used. But their original purpose was to solve the problem of setting a price on early stage companies.
I agree that 20% discount by itself is not appealing enough incentive for the risk of early stage investment. But what about 40%? ...50%? A discount is just the mechanism that most accurately captures the variable nature of valuation. Finding the right number is where the modeling happens.
I believe 25% is the smallest discount I've seen thrown around, 40%-50% is rather common.
As was mentioned elsewhere, smaller discounts tend to apply to shorter horizons, such as when bridging immediately into a round. In those cases, they can be a good way for VCs to get on the cap table with prorata rights without having to muck around in series-A drama.
I'm unclear on how the cap would be a starting point? To DelaneyM & pcmaffey's point, it then becomes a proxy for price, so you've effectively set a valuation.
Would it be more appealing if you the round was closed in the next few months, so you investing early would be well rewarded with the discount?
