As more and more startup companies choose to use convertible securities to raise their seed money, there have been several attempts at standardizing the legal documents required to complete these transactions. The most commonly used forms have been published by Y Combinator and 500 Startups. Y Combinator calls its model convertible investment document the SAFE or “Simple Agreement for Future Equity“. 500 Startups calls its model convertible investment document the KISS or “Keep It Simple Security“. Their common aim is simplifying seed financings through standardization, and for the most part, they’ve accomplished this aim. If founders and investor can agree to a standard form, the list of issues that require negotiation becomes very short – often limited to settling on a conversion discount and/or valuation cap.
In determining whether to use the SAFE or KISS (and which version of said SAFE or KISS), below is a handy reference highlighting some of the key differences:
|SAFE: Cap, no Discount
SAFE: Discount, no Cap
SAFE: Cap and Discount
SAFE: MFN, no Cap, no Discount
|Equity: Cap, Discount, no interest, no repayment
Debt: Cap, Discount, accrues interest, repayable at maturity
|Treatment @ Financing
|Automatic conversion to preferred stock when you raise an equity round of any size.
Conversion price = lesser of cap or discount, if applicable.
|Automatic conversion to preferred stock when you raise an equity round of ≥ $1M of new money.
Conversion price = lesser of cap or discount.
|Treatment @ Acquisition
|Option to (a) convert to common stock at the cap or (b) get paid back the original investment.
|Option to (a) convert to common stock at the cap or (b) get paid a multiple on the original investment.
If debt version, option for repayment.
|Treatment @ Maturity
|Convert to preferred stock at the cap using Series Seed documents.
|Additional Investor Rights?
|1x participation right *after* the next equity financing
|Major investors get basic Information rights (company financials), 1x participation rights in all future financings.
|Basic reps, plus IP.
|Basic reps, plus IP and Litigation.
|High Resolution Financing
|No. All KISSes in a given series are to have identical terms.
|Transferable by Investor?
|Transferable to affiliates of investor only.
|Transferable to anyone.
Generally speaking, the SAFE is a bit more startup company friendly. This is not to say that the SAFE is good and the KISS is bad, or that the SAFE is fair and the KISS is unfair; rather, each set of forms were prepared by different organizations with slightly different goals and biases. Both are good sets of documents and represent a significant upgrade from more traditional convertible notes.