Raising Capital in the Early Stages: The KISS—Convertible Debt or Equity—Part Two

In part one, we covered the basics of a Keep It Simple Security (KISS). This week, we go into greater detail about the conversion of both the debt and equity type KISS, plus the pros and cons of each.

Conversion

The debt and equity KISS have more complexity at conversion than basic convertible debt or a Simple Agreement for Future Equity (SAFE). Here are the three major components of KISS conversion simplified:

1. Both the debt and equity KISS convert to preferred stock when the company raises a qualified equity round of $1 million or more. Conversion is based on the discount percentage or valuation cap, whichever is more favorable to the investor. At the company’s option, accrued interest on a debt KISS may be paid in cash instead of preferred stock.

2. For a debt KISS, if no qualified equity raise is completed by the maturity date and if elected by a majority of investors, the debt KISS will convert into Series Seed preferred stock, with pricing based on the valuation cap.

3. If a “change of control” occurs before a qualified equity raise, both types of KISS will convert into cash at a 2x multiple or into common stock, as elected by each investor.

Identical Terms

Terms for all investors must be identical within one KISS offering. This is an important difference between a KISS and both CD and the SAFE.

Major Investor Rights

Those who invest more than $50,000 get access to quarterly financial statements, information relating to the financial condition of the company, business and corporate affairs, plus 1x participation rights in future equity rounds.

Most Favored Nation (MFN)

This provides protection for the KISS holders before conversion in the event that additional convertible securities are issued with better terms.

Here are the key pros and cons of raising money using a KISS.

KISS Pros

Faster and less expensive to raise capital, as there is significantly less paperwork required than for a priced equity round.
Money can be raised in stages and used immediately; a one-time closing is not required.
Overall valuation discussions may be deferred until the next round raise.
Early investors get rewarded for their contribution with a discount or valuation cap
Investors may like this instrument better than a SAFE or CD, as it gives them protections not available in those instruments.

KISS Cons

Raising too much money in a KISS can make it hard to raise your next equity round
Considering a valuation cap may defeat some of the purpose of using a KISS.
A KISS is a little more complex than a SAFE.

Key point: A KISS may be the best instrument currently available for raising startup capital quickly. It’s easier and less expensive than a priced equity round and strikes a good balance between the company and the investor.

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Are you considering using a KISS or other instrument to raise startup capital? Schedule a one-hour call with us here to discuss how we can help you with strategy, planning, and closing the round.

Until next week!

All the best,