editione1.1.3Updated September 13, 2022
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controversy Various sets of templates for early-stage financing documents are available online. Templates save you time so you can close the round fast, but—despite popular belief to the contrary—even template documents may contain unfavorable terms. You will inevitably hear the phrase “standard documents” or “standard docs.” This is a reference to template documents, but it’s misleading. There is no such thing as a “standard set of documents.” Every law firm has their own set and everything is redlined in a negotiation. In any case, be sure to understand the terms you agree to, and consult a lawyer before you sign anything.
You can execute a convertible instrument agreement by working with a lawyer and drafting your own documents. Alternatively, you can use standardized convertible instrument paperwork from accelerators and other startup programs and institutions.
controversy These tools try to simplify the convertible instrument process, and are known for controversial approaches to eliminating downsides for investors.
Here are three well-known sets of these standardized agreements. The law firm Rubicon provides a thorough side-by-side comparison of safe and KISS.
Definition A safe (Simple Agreement for Future Equity, or SAFE)* is a type of convertible equity that was designed by the accelerator Y Combinator. Y Combinator offers four versions, which differ on valuation cap, discount, and inclusion of a most favored nation clause, plus an optional pro rata side letter. All versions except the one that includes an MFN clause convert into shadow preferred stock. In the MFN version, the safe converts into standard preferred stock. Y Combinator partner Carolynn Levy created the safe as an alternative to convertible debt in 2013.*
caution While using a safe will reduce the legal fee of your deal, founders should make sure to familiarize themselves with the risks of shadow preferred stock.
important In September of 2018, Y Combinator announced two changes to the safe documents. First, safes now calculate ownership using post-money valuations instead of pre-money. Second, granting pro rata rights to safe holders is now optional. There are positives for founders here, particularly in that tracking dilution is easier with the post-money safe. But these moves are in part a response to criticism that the safe wasn’t friendly to investors, so founders should beware. Founders can still use the pre-money safe, but either way, it is important to understand the differences, especially if you’re in California, where the safe is popular. If you are considering using the safe, we highly suggest reading through the Extra Crunch comparison of the pre-money and post-money versions; which one is best for you will depend on the stage of your startup and your expectations for your next fundraising round.
controversy Also at Extra Crunch, startup attorney José Ancer shares an important perspective on the safe vs. convertible equity debate, in light of recent changes to the safe: “My first piece of advice is that a convertible note with a long maturity (three years) and low interest rate (like 2 percent or 3 percent) will give them functionally the same thing—while minimizing friction with more traditional investors.” For all the details backing up Ancer’s opinion, read on. For the changes to the safe from a pro-safe perspective, Ramy Adeeb breaks it down.
Y Combinator offers various versions of safes (like “valuation cap, no discount” and “valuation cap and discount,” as well as a pro rata side letter) free to download.
Definition KISS, which stands for “keep it simple security,” is a set of free convertible instrument templates provided by the accelerator 500 Startups. The set includes a convertible debt template, a convertible equity template, and a summary of the key terms in each. The debt version has both valuation cap and discount options for conversion, accrues interest, and can be repaid in cash before conversion is triggered. The equity version has a cap and a discount, no interest, and no option for cash repayment. Both versions include 1x participation rights for major investors, which 500 Startups defines as those investing more than $50K,* and a most favored nation clause.
Rubicon, a legal advisor to startups, lays out the differences between safe and KISS templates, and the various versions of each.
TheFunded.com, an online community for founders and CEOs, and accelerator Founder Institute created a set of standardized documents for convertible equity with the help of law firm Wilson Sonsini. These templates allow parties to tweak terms like cap and discount to suit their needs and desires.