Raising capital is a critical step for startup founders, and selecting the appropriate financial instrument can significantly impact the future of their ventures. In this article, we will explore three popular fundraising instruments: Simple Agreements for Future Equity (SAFEs), Keep It Simple Securities (KISS), and Convertible Notes. We’ll delve into the features of each instrument, their origins, popularity, conversion events, and whether they are founder-friendly or investor-friendly.
1. Simple Agreements for Future Equity (SAFEs)
Features: SAFEs are straightforward and minimalist investment instruments. They involve an agreement between an investor and a startup, wherein the investor provides capital in exchange for the right to convert their investment into equity in a future financing round.
Origin and Popularity: SAFEs were pioneered by Y Combinator, a renowned startup accelerator in Silicon Valley. They have gained popularity, particularly in the tech startup ecosystem, and have since been used by startups globally.
Conversion Event: At a conversion event, typically a subsequent equity financing round, the investor’s SAFE converts into equity at a predetermined discount rate or valuation cap, providing the investor with equity ownership.
Founder vs. Investor Friendliness: SAFEs are generally considered founder-friendly due to their simplicity and deferred valuation, which allows startups to raise capital without the need to assign a specific valuation to the company.
2. Keep It Simple Securities (KISS)
Features: KISS, similar to SAFEs, aims to simplify the fundraising process. It provides standardized terms, including conversion mechanisms, interest rates, and valuation caps or discounts.
Origin and Popularity: KISS was developed as an alternative to traditional convertible notes and has been promoted by the Angel Capital Association. While it has gained some traction, it is not as widely adopted as SAFEs.
Conversion Event: KISS instruments typically convert into equity during a qualified financing round based on predetermined terms. They may also include an interest rate that accrues over time.
Founder vs. Investor Friendliness: KISS strikes a balance between founder and investor interests. It offers standardized terms, which can streamline negotiations, but it may require a predetermined valuation, which can be a point of contention.
3. Convertible Notes
Features: Convertible notes are debt instruments that convert into equity at a future financing round or maturity date. They include terms such as interest rates, maturity dates, and conversion discounts or valuation caps.
Origin and Popularity: Convertible notes have been in use for many years and were a common choice for early-stage fundraising before SAFE and KISS instruments gained popularity. They are still widely used today.
Conversion Event: Convertible notes convert into equity either when a specified event, such as a financing round, occurs, or upon reaching the maturity date. The conversion price is determined based on the predetermined terms.
Founder vs. Investor Friendliness: Convertible notes can be investor-friendly due to their interest and maturity date, which provide clarity and potential financial returns. However, they can be founder-friendly if the terms are negotiated favorably.
Conclusion
The choice between SAFE, KISS, or Convertible Notes depends on various factors, including the startup’s stage, goals, and the preferences of both founders and investors. While SAFE and KISS are known for their simplicity and flexibility, Convertible Notes offer a more traditional approach with interest and maturity date features. The most widely used and accepted instrument can vary by region and industry, but SAFE is often favored for its simplicity. Ultimately, founders should carefully consider which instrument aligns best with their fundraising needs and long-term objectives, while also consulting legal and financial experts to make informed decisions.
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