Original issue discount (OID) is the gap between what a borrower promises to repay on a note and the lesser amount the lender actually pays at issuance—economically similar to built-in interest.

How it works

Suppose an investor buys a $1M face-value note for $950K at issuance. The $50K difference is OID. U.S. tax rules generally treat OID as interest that accrues over the note’s term, meaning holders may owe tax on imputed interest before receiving cash. Convertible notes in venture often include separate conversion discounts or valuation caps rather than literal OID pricing, but structured debt with upfront discounts triggers OID analysis.

Lawyers and accountants flag OID in note financings, SAFE alternatives, and bridge loans. Accounting may amortize the discount into interest expense on the company side while investors track accrual for tax.

Convertible notes marketed with conversion discounts at the equity round are structurally different from OID priced at issuance. Counsel separates those concepts in purchase agreements so tax and accounting treatment stays clear.

Why it matters

• Founders: You focus on conversion terms and runway; still, use counsel so debt structures do not create avoidable tax or accounting surprises for investors—which can slow closes.
• Investors: OID affects taxable income timing on notes held outside tax-advantaged vehicles. Fund accountants model it in quarterly reports.

Common mistake

Assuming all convertible note “discounts” at conversion are the same as OID at issuance. Conversion discounts are equity-linked; classic OID is about purchase price below par at the start.

Related ideas

See convertible notes, payment-in-kind (PIK), and bridge financing terms.