Safes, KISSes and Other Convertible Notes

November 26, 2014

I previously wrote about what specific things angels may worry about when investing in convertible notes and how we address these at Kima Ventures. When looking at a new note template there are only a few scenarios that can occur after the note has been signed; the company can fail, it can be acquired or IPO, it can raise more convertible notes, it can raise a ‘non-qualified’ equity round (too small, not for preferred stock etc.), it can raise a ‘qualified’ equity round, or the maturity date can be reached with the note still outstanding.

The increasing popularity of convertible equity (for example Y Combinator’s Safe and 500 Startups' KISS) complicates this, so I wanted to compare how some popular convertible debt and equity templates respond in each situation:

Kima Ventures Note - convertible debt with a cap, 20% discount, 6% interest, 24 month maturity, repayable at maturity.
KISS (Equity Version) - convertible equity with a cap, discount, no interest, 18 month maturity, not repayable at maturity.
KISS (Debt Version) - convertible debt with a cap, discount, 5% interest, 18 month maturity, repayable at maturity.
SAFE Cap and Discount - convertible equity, can have a cap and/or discount, no interest, no maturity date, not repayable at maturity.

The table below explains what happens in each situation for each template. For reference, the numbers refer to the relevant article in the template but I’ve condensed and reworded the original text in each case to make it easier to understand and compare.

When the company... ↓	Kima Ventures Note	KISS (Equity Version)	KISS (Debt Version)	Safe, Cap and Discount
...fails	[12.b.] the investor has the option to demand full and immediate payment of the outstanding principal and unpaid accrued interest prior to any payments to the shareholders.	[2.2] treated the same as a 'Corporate Transaction': the investor can elect to have the outstanding principal converted into common stock at the cap, or be paid 2 x the principal of the note prior to any payments to the shareholders.	[2.2] treated the same as a 'Corporate Transaction': the investor can elect to have the outstanding principal and unpaid accrued interest converted into common stock at the cap, or be paid the unpaid accrued interest and 2 x the principal of the note prior to any payments to the shareholders.	[1.c] the note becomes due and payable and the investor will be paid the outstanding principal prior to any payments to the shareholders.
...is acquired	[6.] the investor is paid the greater of (A) 2 x the outstanding principal and unpaid accrued interest or (B) the amount they would have received in the acquisition had they converted immediately prior to the acquisition into common stock at the cap.	[2.2] the investor can elect to (A) have the outstanding principal converted into common stock at the cap or (B) be paid 2 x the principal of the note prior to any payments to the shareholders.	[2.2] the investor can elect to (A) have the outstanding principal and unpaid accrued interest converted into common stock at the cap or (B) be paid the unpaid accrued interest and 2 x the principal of the note prior to any payments to the shareholders.	[1.b] the investor has the option to receive (A) repayment of the principal or (B) convert the principal into common stock at the cap.
...raises more convertible notes	[10.] if the new notes contain more favorable terms, the investor also acquires these terms automatically.	[5.1] the investor may elect to exchange their KISS for the new note if they consider the terms to be more favorable.	[5.1] the investor may elect to exchange their KISS for the new note if they consider the terms to be more favourable.	if using the MFN version: [3.] the investor may elect to amend their SAFE to the terms of the new note if they consider the terms to be more favorable.
...raises a 'non-qualified' equity round	the note does not convert and no additional rights are granted.	the note does not convert. [5.2.b] ‘major investors’ (principal>$50k) have the right to participate and purchase more shares for up to 1 x the original principal.	the note does not convert. [5.2.b] ‘major investors’ (principal>$50k) have the right to participate and purchase more shares for up to 1 x the original principal.	[1.a] the principal of the note converts automatically into 'Safe Preferred Stock' (identical to the preferred shares issued in the financing but with a liquidation preference, anti-dilution and dividend rights based on the conversion price) at the lower of the discount x the price paid the new investors, or the cap. [1.a.ii] the investor is given the right to purchase their pro rata share of new securities issued after the equity financing where they convert.
...raises a ‘qualified’ equity round	[3.a] the outstanding principal and unpaid accrued interest of the note converts automatically into the same preferred shares issued in the financing at the lower of the discount x the price paid the new investors, or the cap. [5] the investor is entitled to participate in the qualified equity round to maintain the percentage of the company they would have held prior to the round.	[2.1] the principal of the note converts automatically into ‘Shadow Series’ shares (identical to the preferred shares issued in the financing but with a liquidation preference equal to the conversion price) at the lower of the discount x the price paid the new investors, or the cap. [5.2.b] ‘major investors’ (principal>$50k) have the right to participate and purchase more shares for up to 1 x the original principal.	[2.1] the outstanding principal and unpaid accrued interest of the note converts automatically into the ‘Shadow Series’ shares (identical to the preferred shares issued in the financing but with a liquidation preference equal to the conversion price) at the lower of the discount x the price paid the new investors, or the cap. [5.2.b] ‘major investors’ (principal>$50k) have the right to participate and purchase more shares for up to 1 x the original principal.	there is no definition of a 'qualified' round size, the note converts automatically at the next capital raising transaction where the company issues preferred stock at a fixed pre-money valuation.
...reaches the maturity date.	[2.] the note becomes due and payable. [3.b.] the investor gains the option to, at any time, convert the outstanding principal and accrued interest into common stock, or a newly created class of preferred stock, at the discount x the cap. [3.a] if a qualified financing occurs after the maturity date, the note will still convert automatically.	the note does not become payable. [2.3] the majority can elect to convert the outstanding principal into a newly created class of preferred stock based on the Series Seed documents at the cap. [2.1] if a qualified financing occurs after the maturity date, the note will still convert automatically.	[0.] the note becomes due and payable on demand by the majority of the investors at any time after the maturity date. [2.3] the majority can elect to convert the outstanding principal and unpaid accrued interest into a newly created class of preferred stock based on the Series Seed documents, at the cap. [2.1] if a qualified financing occurs after the maturity date, the note will still convert automatically.	there is no maturity date, the note is not repayable based on time. the note will still convert automatically at the next capital raising transaction where the company issues preferred stock at a fixed pre-money valuation.