Raising Capital in the Early Stages: The KISS—Convertible Debt or Equity—Part One

Last week’s post covered raising cash using a SAFE. This week, we’ll cover the KISS or Keep It Simple Security, Part One.

KISS Basics

The KISS was developed by 500 Startups to allow early-stage companies to raise capital quickly from accredited investors without significant expense. It comes in two versions, a debt type—which accrues interest and has a maturity date—and an equity type, which comes with neither. Both convert into equity, like Convertible Debt (CD) or the SAFE. The debt type is more investor-friendly and appears to be the KISS type of choice for more sophisticated investors.

KISS Specifics

This week we’ll cover basics about this instrument.

Amount

KISS amounts are usually up to about $2.0 million. The KISS will convert in the next “qualified” equity round, so the amount raised should be no more than about 15% to 20% of your forecast qualified next round of equity. If you raise too much capital using a KISS, it may take up a significant portion of the equity round when it converts, reducing the ownership percentage the next round investors receive and potentially nixing the deal.

Interest

The debt KISS has a proposed interest of 4% per year, which accumulates until it converts. The equity KISS has no interest.

Discount

Both the debt and equity KISS come with a discount rate; typically 20%. This gives investors an incentive to invest early, rewarding them with more shares than next round equity investors for the same amount of money invested.

Valuation Cap

Both the debt and equity KISS come with a valuation cap. The cap sets the maximum pre-money valuation of the company at conversion, thereby defining the minimum equity percentage the KISS investor will own once the conversion is complete.

Transfer

A KISS is transferable, providing the transfer is in compliance with applicable federal and state securities laws.

Summary, KISS Part One

Depending on the whether you use a debt or equity type KISS, the recommended amount raised, interest, discount, and valuation cap terms are similar to convertible debt or the SAFE.

Next post, we’ll cover Conversion for both the debt and equity type KISS, which are slightly more complex than CD and the SAFE, but do a better job of protecting the investor while not significantly handicapping the company.

Until next week!

All the best,