Most of you will be familiar with the very complicated “Simple Agreement for Future Equity” (commonly known as a “SAFE”), but have you ever heard of the KISS (Keep it simple securities)? The KISS is much less popular than the SAFE despite the fact that it’s been around since 2014.
As you probably know, SAFEs were created in 2013 by Y Combinator, a Silicon Valley accelerator as a simpler alternative to convertible notes. The aim was to allow startups to obtain seed investments without interest rates or maturity dates. Generally, the valuation caps and/or the discount on the conversion price were to be the only negotiable detail.
In practice the SAFE it has become more and more complicated to negotiate, but as there are no exploding clauses that can wipe out the company, it is still considered “SAFE” for the startup; with almost no protection for the investor. The conversion of the SAFE is predicated upon a future investment round (usually in a minimum amount with a minimum valuation). In the event that the company does not raise future rounds of equity capital that qualify as a trigger for the conversion of the SAFE, the SAFE can stay a SAFE in perpetuim without providing the investor with any financial or other benefit, such as interest.
What about the KISS?
A Kiss is basically a convertible note that it accrues interest at a stated rate (5%) and establishes a maturity date (18 months) after which the investor may convert the underlying investment amount, plus accrued interest, into a newly created series of preferred stock of the company. In addition, a standard KISS contains an MFN clause, which allows the investor to get better securities in the future if issued by the company. A KISS also provides additional rights to investors, such as information rights (financials) and the equivalent of preemptive rights in the next equity financing. The KISS is also transferable.
The KISS is clearly a better option for an investor, so why haven’t we heard of the KISS?
AS noted above, the SAFE does not provide the investor with almost any protection, and in the event that the company does not raise future rounds of equity capital, the SAFE can stay a SAFE in perpetuim. Investors could be waiting endlessly for maturity even once the business is turning a profit, and with no interest being accrued.
Notwithstanding the obvious advantages of a KISS from the point of view of the investor, the KISS is rarely seen on our shores while we seem to be having a flurry of SAFEs.
So why haven’t we heard of the KISS in Israel – if you have any ideas I’d love to know.
 Most favored nation clause that allows the convertible note holder to elect to inherit any more favorable terms that are offered to any subsequent investors.