comparing safe, kiss and nvca term sheets
TRANSCRIPT
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