comparing safe, kiss and nvca term sheets
Post on 15-Apr-2017
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May Be Hazardous to Your Returns
WARNING
Background
SAFE (Simple Agreement for Future Equity)
KISS (Keep It Simple Security) NVCA Term Sheet
Created Y Combinator (Carolynn Levy, 2013) 500 Startups (Gunderson Dettmer, 2014) National Venture Capital Assoc.(When dinosaurs roamed the earth)
Structure q A promise to exchange currently invested $$ for equity at future financing ($250K minimum) or change of control or IPO
q Convertible instrument with cap and/or discount, OR Most Favored Nation without a cap or discount
q Cash returned (prorata) to all SAFE investors in event of dissolution or liquidity event
q No maturity dateq Not treated as debt obligationq Conversion at 250K equity round
q A promise to exchange currently invested $$ for equity in the event of future financing including mechanisms to protect investors if financing does not happen. Two forms exist:
q Convertible debt with cap and/or discount. 5% interest.
q Convertible equity (just like convertible debt but with no interest).
q 18 month maturityq Converts at $1M future equity roundq Mechanisms exist for conversion if no
equity round occursq $50K investors granted information
and participation rightsq Most Favored Nation
q A standard, priced equity round enumerating valuation and investor rights and protections
q Usually includes some or all of these:
q Liquidation preferencesq Dividendq Stock option poolq Future investment rights,
voting rights, Board rights, information rights
q Control provisions
Best for q Very small deals or insider bridge rounds
q Equity sellers’ market
q Very small deals or insider bridge rounds
q Equity sellers’ market
q Later/larger seed or Series A sized deals
q Equity buyers’ market
SAFE (Simple Agreement for Future Equity)
KISS (Keep It Simple Security) NVCA
Rationale & CompanyBenefits
q Incubator-funded companies receive too little capital for more than basic legal fees
q Low cost & fastq Defer valuation negotiationq No debt on balance sheetq Since SAFE is not a debt,
reduces insolvency risk if investment is never repaid and never converts to equity
q Incubator-funded companies receive too little capital for more than basic legal fees
q Low cost & fastq Defer valuation negotiationq Restore investor/company
balance lost with SAFE
q Comprehensive agreement with (sometimes) clear statements describing future outcomes across different contingencies and the rights of different classes of shareholders and stakeholders
q Be perceived as a more mature company
Angel Benefits
q Attract startups to Angel group
q Minimize complexity of very small deals
q Enables conversion to equity in absence of future financing
q Attracts startups while protecting Angels
q Minimize complexity of very small deals
q The way the grown up world works
q Strong investor protections including control rights
q Comprehensive, deals with most common contingencies
SAFE (SimpleAgreement for Future
Equity)
KISS (Keep It Simple Security)
NVCA
Negatives for Angels
q Lacks investor protectionsq No liquidation preferencesq Unclear recourse if note not
repaid or converted to equityq No control provisionsq If SAFE lacks a cap, investors
may be screwed
q Stronger but still only moderate investor protections
q No liquidation preferencesq No control provisionsq If KISS lacks a cap, investors may
be screwed
q May make angel groups less competitive than organizations willing to use SAFE or KISS
Negatives for management
q As a Cap is an implied valuation, it may require negotiation
q If price at conversion < Cap, can be an implied down-round, a big negative
q Gives management false sense that they don’t really need venture lawyers quite yet
q As a Cap is an implied valuation, it may require negotiation
q If price at conversion < Cap, can be an implied down-round, a big negative
q Gives management false sense that they don’t really need venture lawyers quite yet
q Insolvency risk from maturity date—and investors can force new terms
q Weighted towards investorsq Forces valuation negotiationq More time consumingq More complicated & costlyq Management may not really
understand future impactq Can create a risk of future
insolvency–and investors can demand new terms when “Sword of Damocles” mandatory redemption date approaches
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