The Discount Rate gives a “discount” the Valuation in the next round of Funding.

Let’s say our Valuation in our next Fundraise is $10m. The new investors (not our existing investors) would use the $10m Valuation.

But the existing investors (who already invested) would get a 20% discount to the valuation, so their investment would convert at an $8m Valuation.

The Discount Rate effectively ensures that whatever future round of financing exists, the existing investors get the benefit of having invested earlier. Combined with the Valuation Cap, they act as a mechanism to reward early investors for their participation.