A KISS is a “Keep It Simple Security”. It is an agreement between a company and an investor: the investor invests money in the company and, in exchange, receives the right to purchase shares in a future equity round when it occurs. You may like to think of a KISS as a hybrid: it aims to keep the simplicity and user-friendly-ness of a SAFE, but with some of the investor protections found in convertible notes.
Where did it come from?
500 Startups is an early-stage seed fund and incubator with a focus on consumer and small-to-medium-sized internet startups. 500 Startups developed the suite of KISS legal documents, following discussions with Silicon Valley law firms and early-stage investors, and made them open source (i.e. they were made publicly available to use and develop further). The KISS was developed in response to the lack of investor protections in a SAFE which were therefore perceived as too founder-friendly.
How does it work?
A KISS is broadly similar to a SAFE but includes some downside protections which are standard in convertible note instruments. A KISS accrues interest and has a maturity date after which the investor may convert the underlying investment amount, plus accrued interest, into a new series of preference shares in the company. KISSes provide basic information rights on financial statements to investors and the right to participate in future equity funding rounds.
The key features of a KISS are:
• Identical terms: All KISSes in a series are on the same terms so they do not allow for high resolution financing (i.e. raising finance at different valuation caps).
• “Most Favoured Nation” clause: If the company subsequently offers a KISS or other convertible instrument on better terms than those set out in an investor’s relevant KISS, the company must also offer those preferable terms to the investor.
• Control and dividends: An investor does not usually have any management rights or receive any dividends until the KISS converts into shares.
• Accounting: A KISS is not treated as debt on the company’s financial statements.
Why would I use a KISS instead of a SAFE?
KISSes are generally considered to favour investors more than SAFEs so a potential investor in your company may insist on one. Angel investors are more concerned about not cashing in when a company in which they have invested is successful than they are about losing money on a failed startup. Several provisions in a KISS document help protect investors from not getting a return from their thriving portfolio companies, including the “Most Favoured Nation” clause and the conversion to preference shares at maturity:
If you’d like to know more, please see A Convertible Loan Note, a KISS or a SAFE: how do I choose? for more information comparing these three instruments.
What is market?
In the international startup eco system, there are two types of KISSes: one resembles a convertible debt structure and the other an equity financing structure. The two are similar but an equity KISS instrument does not accrue interest. This type of KISS is generally viewed as being an attractive middle ground between the convertible debt KISS instrument and the SAFE.
In our experience, the basic forms of the KISS are accepted, but individual terms vary in the market. For both types of KISSes we typically see them include both caps and discounts. On balance, the convertible debt-style KISS (as opposed to the equity-only KISS) is the form we have found to be more commonly used by startups in this region.
What else could I use?
If you’d like to know more, please see FUND my business for information on Convertible Loan Notes, SAFEs and financing generally.
Click here to generate your ScaleUp KISS.
Contrary to what we tend to see more often in the market, our ScaleUp KISS is not a debt obligation and the investor cannot request a return of their investment amount (except where the company experiences a liquidity event). From our perspective, this better reflects the reality of the situation: on the maturity date of the KISS, if a company has not yet raised equity financing (which would have the effect of triggering the conversion of the KISS) there’s not going to be any money in the company’s bank account for the investor to request repayment. Coupled with the fact that regional bankruptcy laws are not Founder-friendly, from our perspective, structuring our KISS as a non-debt instrument is the right way to go.
Our ScaleUp KISS contains different terms to those seen in the US, for example. In our experience, providing a firm dollar amount target for purposes of satisfying the definition of what constitutes a “Qualifying Equity Financing” can lead to unexpected consequences. For example, if the terms of the KISS provide that a “Qualifying Equity Financing” must involve the raising of at least USD 1 million by the company, but the company only needs USD 500,000 to get through the next two years, Founders can find themselves feeling forced to bring on new investors they might not want and spending valuable time pitching for investment they don’t need.