Today, we’re diving into two simpler legal agreements that are popular in the U.S. but still pretty rare in the CE startup scene: SAFEs and KISSes.
In this post, we’ll break down what SAFEs and KISSes are, how they differ from convertible loans, and why they might be the right fit for your startup. Plus, at the end, we’ve included a handy comparison chart to help you quickly understand the key differences.
What are SAFEs?
SAFEs stand for “Simple Agreement for Future Equity.” And the name says it all. It’s basically a streamlined version of a convertible loan—without interest or maturity (yes, you read that right!). It was developed in the U.S. by Y Combinator to make the fundraising process cheaper, faster, and easier, helping startups get cash as soon as possible.
How Do SAFEs Work in Practice?
A SAFE works similarly to a convertible loan in that an investor gives money to your startup in exchange for the right to convert that investment into equity during the next funding round (called a “qualified investment round”). The idea behind a SAFE, just like a convertible loan, is that the investor gets to buy equity at better terms than investors who come in later.
Why Better Terms?
Just like with a convertible loan, early-stage investors are taking on more risk by investing before the startup is fully established. However, with a convertible loan, the investor can ask for their money back with interest under certain conditions.
A SAFE simplifies things by removing the repayment and interest components. The expectation is that the investor won’t get their money back in cash; instead, they’ll convert it into equity. If the startup fails, the investor loses their money, and that’s the end of it. However, the details of a SAFE can still be negotiated. There are four basic versions of SAFEs:
- With a valuation cap and a discount;
- With only a valuation cap;
- With only a discount;
- Without a valuation cap or discount (this is pretty rare).
If you want to know more about valuation caps and discounts, check out our blog on convertible loans.
From a legal standpoint, a SAFE isn’t a financial obligation for your startup; it’s simply the investor’s right to acquire equity in your company.
Of course, like any contract, the final terms of a SAFE depend on what the founder can negotiate. A well-prepared term sheet and the help of a lawyer can make sure the SAFE is structured in the best possible way. And don’t worry, preparing a SAFE with a term sheet takes way less time than without one.
Why Aren’t SAFEs More Popular in Central Europe?
Despite being a simpler, faster option, SAFEs haven’t caught on with Central European investors. Why? SAFEs aren’t exactly “investor-friendly.” They don’t offer the same level of protection as a convertible loan, which can make investors feel less secure.
However, the end result of a SAFE is pretty similar to a convertible loan. If things go well, the investor converts their investment into equity. If things go poorly, the startup doesn’t have the money to pay back, and the investor loses their investment anyway.
The simplicity and cost savings of SAFEs can give investors who use them a competitive edge, as they save founders time and money on legal fees and make the entire process faster.
What are KISSes?
Another investment tool that startups can use to raise money quickly is the KISS, which stands for “Keep It Simple Securities.” A KISS sits somewhere between a SAFE and a convertible loan in terms of investor protection (see the comparison chart below). KISSes were developed in response to SAFEs to give investors more rights by reintroducing things like maturity and interest.
While investors tend to prefer KISSes over SAFEs, that doesn’t mean founders should shy away from them. KISSes are highly standardized documents, so negotiating them is still quick and relatively affordable.
How Do KISSes Work?
Like a convertible loan, a KISS allows an investor to provide money to your startup in exchange for future equity. But unlike a SAFE, a KISS allows the investor to get their money back, plus interest. The typical maturity for a KISS is 18 months, with a usual interest rate of 5%.
Unlike SAFEs, which convert in the next investment round, KISSes only convert in a “qualified investment round” when the startup raises a set amount of money—typically at least €1M. This means that conversion usually happens later than with SAFEs or convertible loans. And if the startup doesn’t hit a qualified round before the KISS matures, the investor can demand repayment with interest.
KISSes come in two flavors: the debt version (with maturity and interest) and the equity version (without either). The equity version of a KISS is similar to a SAFE, where there’s no financial obligation for the startup to repay.
One cool thing for investors is that KISSes often include a “Most Favored Nation” clause, which ensures the investor’s rights are no worse than those given to any future investors. This protects the investor from ending up with a bad deal compared to later rounds.
Another investor-friendly feature is the “exit premium.” If the founder decides to sell the company, the investor can either take back a multiple of their investment or convert their loan into equity based on the valuation cap.
The valuation cap and discount are usually negotiated case by case, so it’s up to both parties to strike a deal that works for them.
Comparison with Other Contracts
We’ve put together a quick comparison of the different types of contracts below:
| Equity Investment | Convertible Loan | SAFE | KISS | |
| Speed | Slow | Fast | Fastest | Fast |
| Negotiation | Extensive | Medium | Minimal | Minimal |
| Fees | High | Low | Lowest | Low |
| Investor Protection | High | Medium | Low | Low |
| Company Valuation | Yes | No | No | No |
| Discount in Next Round | No (rarely yes) | Possible | Possible | Yes |
| Valuation Cap | No | Possible | Possible | Yes |
| Valuation Floor | No | Possible | No | No |
| Maturity | No | Yes | No | Possible (rare) |
| Most Favored Nation | Possible | Possible | No | Yes |
That’s the breakdown on SAFEs and KISSes! If you’re looking for a quick, cost-effective way to raise funds, either of these might be a great option for your startup. Just remember, while they’re simpler than convertible loans, you’ll need to weigh the pros and cons depending on what’s best for you and your investors.
To learn more about converible loans, check out our latest blog post:
