Accelerator Firms Introduce New Seed Funding Structures

Two accelerator firms, 500 Startups and Y Combinator, have introduced two new structures for early-stage equity financing in the past few months. Y Combinator’s structure is called SAFE (which stands for Simple Agreement for Future Equity); 500 Startups calls their structure KISS (for keep it simple security). SAFE appears to be a form of convertible equity, while KISS comes in either convertible debt or convertible equity forms. SAFE comes in several forms that can come with caps and/or discounts, or the ability to amend the SAFE in the event the company issues a further SAFE along more favorable terms. Of course, SAFE converts into preferred stock in the event of a preferred equity financing round, or an IPO or change of control transaction. SAFE appears to require a valuation of the company, as SAFE allows the investor to convert upon the higher of the valuation in the SAFE round or the valuation in the equity financing. Unlike convertible debt, there is no interest or debt attached to the investor’s money with SAFE; however, unlike types of convertible equity I’ve heard about, there is no conversion to common stock (typically founder’s common stock) upon maturity. KISS convertible debt is a simplified convertible note, with interest at 5% and maturity in 18 months, with the option for the company to pay the note in cash. Unsurprisingly, the note converts to preferred stock upon a round of $1 million plus. Upon change of control, KISS-holders can cash out at 2X or convert into common stock. In the event that a KISS security does not hit a conversion event and the company does not want to pay the balance of the note in cash, the balance can be converted into a series stock along standardized terms or the maturity of the note can be extended, at the option of a majority of the KISS-holders. KISS convertible equity works like KISS convertible debt, except there is no interest rate, and have both a cap and a discount and convert at the lesser of the two. However, KISS convertible equity doesn’t appear to have any other differences from KISS convertible debt, and really isn’t structured like convertible equity that I’ve read about. I still wonder about the reception for convertible equity, including the convertible equity forms outlined above. While some convertible equity structures come with an interest rate, the ones above do not, and in any event are not as secure as debt, as no part of the investment can be recovered in the even the company dissolves, unlike debt-holders who can usually receive at least cents on the dollar. I’d be interested to hear stories from anyone who has proposed a convertible equity deal to an angel or professional investor, and what the reception was like. Further reading:

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