Posted by Assure ● Jun 23, 2020 12:09:44 PM
There are four common types of convertible debt that founders will often issue: Convertible Notes, Simple Agreements for Future Equity (SAFE), Keep It Simple Security (KISS), and Simple Agreements for Future Tokens (SAFT). Each of these are distinctive and may include standard terms that make them preferable over each other in certain circumstances. Below are descriptions of the instruments and the terms that would typically come with each.
First is the convertible note. Convertible Notes are the most investor friendly of the convertible debt instruments. They typically have an interest rate, a discount rate, valuation caps, a QFE that would require a significant raise, and maturity dates. In an investing atmosphere where cash is more freely available, and attractive investments abound, the use of convertible notes are waning against SAFEs or KISS’.
SAFE, Simple Agreement for Future Equity was created by the Y Combinator as an easy way for investors to get funding quickly. SAFEs could be described as the most company-friendly investment due to the terms. They do not accrue interest, they do not have a maturity date, they typically do not have a discount rate, and they may or may not have a valuation cap. The QFE for a SAFE is typically a $1 bona fide purchase. SAFE documents have become widely available because of their ease of use - anyone can download the documents, plug in the information they want, and begin raising funds.
The Keep It Simple Security (KISS) is similar to the SAFE and was introduced by 500 startups as an alternative to both the convertible note and the SAFE. The KISS may or may not have an interest rate or maturity date. It will have a valuation cap and discount rate, and has a QFE of one million dollars. KISS’ also include information rights, which entitle the investor to the companies financials. As a result, KISS’ are more investor friendly, while still not as friendly as a classic convertible note.
Finally, The Simple Agreement for Future Tokens (SAFT) is possibly the most unique of the four types of convertible instruments because it is the only type of convertible instrument that it is not debt at all, and does not convert into equity. As the name implies, the purchaser of the note is entitled to receive tokens at a rate determined by the contract. Rather than being triggered by a maturity date or QFE, it is typically triggered by an Initial Crypto Offering (ICO) when the company that was invested is ready to issue the tokens they created. The tokens do not represent equity in the company, and investors typically invest in a SAFT with the specific interest of earning tokens that serve a purpose in the crypto ecosystem. Because the SAFT is not an equity conversion instrument, most of the terms outlined above do not apply. There is no standardized form for these documents. Anyone investing in a company looking to issue tokens should have counsel who is familiar with the world of crypto tokens to help draft and review their agreement.
Convertible instruments have become more and more popular over time as start ups and investors have sought to streamline the fundraising process as much as possible. While the process is now arguably easier than it has ever been, there are still several complexities that both investors and founders need to know.
At Assure, we have successfully converted over 800 debt instruments, with hundreds of others yet to convert. We track interest, sign consents, verify share allocations, and receive new certificates. We work with organizers and companies to make sure that all of the required documents are filed in a timely and accurate manner.