Term Warfare: Comparing SAFE, KISS & NVCA Term Sheets, by Ronald Weissman, Band of Angels. For the Angel Capital Assocation's Western Regional Meeting, Feb, 2007

1. May Be Hazardous to Your Returns

2. WARNING

3. Background

4. SAFE (Simple Agreement for
Future Equity)
KISS (Keep It Simple Security) NVCATerm Sheet
Created Y Combinator (Carolynn Levy, 2013) 500 Startups (Gunderson Dettmer, 2014) NationalVenture Capital Assoc.
(When dinosaurs roamed the earth)
Structure q A promise to exchange currently
invested $$ for equity at future
financing ($250K minimum) or
change of control or IPO
q Convertible instrument with cap
and/or discount, OR Most Favored
Nation without a cap or discount
q Cash returned (prorata) to all SAFE
investors in event of dissolution or
liquidity event
q No maturity date
q Not treated as debt obligation
q Conversion at 250K equity round
q A promise to exchange currently
invested $$ for equity in the event of
future financing including mechanisms
to protect investors if financing does
not happen.Two forms exist:
q Convertible debt with cap and/or
discount. 5% interest.
q Convertible equity (just like
convertible debt but with no interest).
q 18 month maturity
q Converts at $1M future equity round
q Mechanisms exist for conversion if no
equity round occurs
q $50K investors granted information
and participation rights
q Most Favored Nation
q A standard, priced equity
round enumerating valuation
and investor rights and
protections
q Usually includes some or all
of these:
q Liquidation preferences
q Dividend
q Stock option pool
q Future investment rights,
voting rights, Board rights,
information rights
q Control provisions
Best for q Very small deals or insider bridge
rounds
q Equity sellers’ market
q Very small deals or insider bridge
rounds
q Equity sellers’ market
q Later/larger seed or Series A
sized deals
q Equity buyers’ market

5. SAFE (Simple Agreement for
Future Equity)
KISS (Keep It Simple Security) NVCA
Rationale &
Company
Benefits
q Incubator-funded companies
receive too little capital for
more than basic legal fees
q Low cost & fast
q Defer valuation negotiation
q No debt on balance sheet
q Since SAFE is not a debt,
reduces insolvency risk if
investment is never repaid
and never converts to equity
q Incubator-funded companies
receive too little capital for
more than basic legal fees
q Low cost & fast
q Defer valuation negotiation
q Restore investor/company
balance lost with SAFE
q Comprehensive agreement
with (sometimes) clear
statements describing future
outcomes across different
contingencies and the rights
of different classes of
shareholders and
stakeholders
q Be perceived as a more
mature company
Angel
Benefits
q Attract startups to Angel
group
q Minimize complexity of very
small deals
q Enables conversion to equity in
absence of future financing
q Attracts startups while
protecting Angels
q Minimize complexity of very
small deals
q The way the grown up world
works
q Strong investor protections
including control rights
q Comprehensive, deals with
most common contingencies

6. SAFE (Simple
Agreement for Future
Equity)
KISS (Keep It Simple
Security)
NVCA
Negatives for
Angels
q Lacks investor protections
q No liquidation preferences
q Unclear recourse if note not
repaid or converted to equity
q No control provisions
q If SAFE lacks a cap, investors
may be screwed
q Stronger but still only moderate
investor protections
q No liquidation preferences
q No control provisions
q If KISS lacks a cap, investors may
be screwed
q May make angel groups less
competitive than organizations
willing to use SAFE or KISS
Negatives for
management
q As a Cap is an implied
valuation, it may require
negotiation
q If price at conversion < Cap,
can be an implied down-
round, a big negative
q Gives management false
sense that they don’t really
need venture lawyers quite
yet
q As a Cap is an implied valuation, it
may require negotiation
q If price at conversion < Cap, can be
an implied down-round, a big
negative
q Gives management false sense
that they don’t really need venture
lawyers quite yet
q Insolvency risk from maturity
date—and investors can force new
terms
q Weighted towards investors
q Forces valuation negotiation
q More time consuming
q More complicated & costly
q Management may not really
understand future impact
q Can create a risk of future
insolvency–and investors can
demand new terms when
“Sword of Damocles”
mandatory redemption date
approaches