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?