The KISS and SAFE notes are both evolutions of the traditional convertible loan notes. A convertible loan note, is a form of short-term debt that converts into equity, typically in conjunction with a future financing round. In plain words, this means that the Investor (angel or institutional), would be loaning money to a Startup in return of receiving equity in the future.
Mindful of the hassle that comes with reviewing legal documents (in the traditional sense), and in order to facilitate the process of review and save on time and cost, 500 Startups and Y Combinators, two venture capital giants, publicly introduced their proprietary investment contract for early-stage investments known respectively as the ‘KISS’ and ‘SAFE’.
The purpose of this is to provide investors and startups with a legal document (be it the KISS or the SAFE) that does not require any major review efforts, where only the key parameters need to be defined. They Key parameters to keep in mind when reviewing a convertible loan, KISS or SAFE Note are:
- Interest Rate: determines whether the loan extended by the Investor will accrue interest or not.
- Maturity Date: determines at which point in time the startup will need to pay back the loan.
- Valuation Cap: determines the price at which the note converts into equity.
- Discount Rate: determines the valuation discount the holder of the convertible note will benefit from as opposed to future investors.
This does not mean that all KISS or SAFE notes are all identical. Today, there are 4 types of SAFE Notes and 2 types of KISS Notes (in my next article, I’ll draw up a simple comparison of these different types).
KISS and SAFE notes do not require any drafting and preparation efforts. You can directly download KISS and SAFE notes through 500 Startups and Y Combinators. Ideally, you would only need to fill out the ‘Key Parameters’ previously mentioned and introduce no additional changes thereto.
With no drafting efforts required, the only few things you will need to consider are the following:
- Which type of KISS/SAFE note is better for me?
- If my startup is established outside the US (e.g. Dubai or Riyadh), can I still enter into the KISS/SAFE note and would it be enforceable?
- How would the KISS/SAFE note affect my Cap table?
Determining the above is relatively simple. If you have any additional questions about KISS and SAFE notes, feel free to drop a comment below or click the ‘Request a Meeting’ button on our Homepage!