Why 500 Canada Prefers a KISS From a Unicorn (Instead of Playing it SAFE)

May 17, 2017

Now that 500 Startups has got its bearings within Canada, we felt it was time to introduce everyone to our legal documents affectionately called the KISS (“Keep it Simple Security”). If you are a founder or investor, give us five minutes of your time.

(But if you don’t have the time, then here is the TL;DR: A KISS effectively sits between a Convertible Note and SAFE in terms of simplicity and balanced rights for the company and investor. For example, the KISS provides information and participation rights over the SAFE, but doesn’t impose protective provisions like a standard Convertible Note).

In the past, convertible notes were one of the most popular ways to structure seed stage financings. If done right, convertible notes are a simple and efficient means to close a round of financing because they contain limited rights and defer some of the more complicated negotiations until the (larger) priced round. However, convertible note financings have grown increasingly more complicated as companies push for complex conversion scenarios and an abundance of features. This complexity increases legal costs for companies and investors, and extends the time it takes to close a deal.

More recently, Y Combinator released the SAFE, which was a big step forward in reducing cost and complexity and creating a true industry standard (we have used them on several occasions since we are a frequent investor in YC companies). Still, we had yet to see a financing form that struck the right balance for us – a balance between the interests of the founders as well as those of the investors. While historically investors have had more negotiating leverage than founders, sometimes we felt the pendulum had swung too far, and smaller angel investors may well be the ones under pressure to accept unbalanced terms. The KISS legal docs were built on the shoulders of our predecessors and were designed with balance and simplicity in mind.

500 put in a lot of work to make KISS docs what we believe to be one of the best convertible instruments on the market and, since launching in 2014, they’ve become our preferred approach when leading a round. That said, we’d love to see KISS docs adopted by other companies and investors, thereby reducing legal costs for everyone and eliminating some of the friction involved in closing a round of financing.

And for that reason, we are making Canadian versions of the KISS freely available for your use:

And finally, here is summary of how the KISS compares to a standard Convertible Note and SAFE:

 

SAFE KISS Equity KISS Debt Convertible Note
Type of Instrument No interest
No repayment
No interest
No repayment
Accrues interest
Repayable at maturity
Accrues interest
Repayable at maturity
Valuation Cap Depends on form of SAFE Yes Yes Yes
Discount Depends on form of  SAFE Yes Yes Yes
Treatment @ Financing Automatic conversion to preferred stock. No threshold amount to trigger conversion. Automatic conversion to preferred stock with qualifying priced round ($1M) Automatic conversion to preferred stock with qualifying priced round ($1M) Automatic conversion to preferred stock with qualifying priced round ($ TBD)
Treatment @ Maturity N/A Option to convert to stock at the cap Option to convert to stock at the cap, or option for repayment Option to convert to stock at the cap, or option for repayment
Treatment @ Acquisition Option to either (a) convert to common stock at the cap or (b) get paid 1x the original investment Option to either (a) convert to common stock at the cap or (b) get paid a 2x multiple on the original investment Option to either (a) convert to common stock at the cap or (b) get paid a 2x multiple on the original investment Option to either (a) convert to common stock at the cap or (b) get paid some multiple on the original investment
MFN Applicable on the ‘MFN’ form of SAFE (which has no cap or discount) If the company issues better securities in the future, KISS investors can convert to those terms instead If the company issues better securities in the future, KISS investors can convert to those terms instead Uncommon in convertible notes.
Major Investor Rights None (no information or participation rights) Major investors ($50K+) get basic information and greater of 1x investment or  $300k participation rights Major investors ($50K+) get basic information and greater of  1x investment or $300k participation rights Major investors get information and participation rights
Redemption Rights None None None Require company to repurchase shares after a specified period of time
Protective Provisions None None None Require company to seek approval for change in key employees, out-of-budget expenses, etc.
Other Items May include liquidation preferences, terms of board composition, etc.

 

Big thanks to LaBarge Weinstein for working with us on this project. And a special mention to NACO for all their hard work with the Common Docs project. We are thrilled to support their mission of providing founders and investors more templates.

If you have comments and/or suggestions as to how we can improve our docs, or if you want to be included on the list of investors who has agreed to accept the forms, let us know by sending us an email at kiss@500startups.com.

You are encouraged to review the terms of the KISS documents with your own lawyer before using them. 500 Startups does not assume any responsibility for any consequence of using the KISS.