How should a portfolio company's valuation be updated when there there is a discount in the deal terms?

Generally speaking, if contemplating SAFEs, convertible notes, or other types of convertible instruments which feature a discount, the discount does not factor into the portfolio company's valuation. These are typically held at cost (what the investor paid) until a priced round where such instruments convert into preferred equity, though you will need to verify per the Fund's valuation policy. 

When a convertible instrument is converted into preferred equity during a priced round (a preferred stock financing), the discount is applied at that time and typically affects the number of shares of preferred stock issued. Afterwards, the portfolio company's valuation is generally based on the price-per-share of the preferred stock of the latest financing applicable.