A lot of entrepreneurs have heard of convertible notes, which is a form of debt instrument, they have there problems. Mark Suster documented them here and James Geshwiler talked more recently about them here. So what is an early stage founder supposed to do? I would suggest using the open source documents produced by 500 startups, called KISS or “Keep it Simple Security” which they released in July of 2014 and were produced in collaboration with Gunderson Dettmer. The KISS documents are a later version and flavor of convertibles first produced by YC called SAFE documents ( I’ll post more on those later).
Convertible Notes have been the most popular way to finance seed stage deals over the last few years because they are generally simpler and more cost efficient than a formal priced round. If a convertible note round is done right they can be simple and easy to complete because they contain less negotiation points as they have limited rights but as 500 Startups notes convertible note financing have grown increasingly complex containing more complicated conversion scenarios and numerous additional features.
Convertible Debt Version
We at MELD like their convertible note document a lot. The documents are clear and simple, and have no surprising terms. We particularly like that the KISS convertible note agreement addresses the case of non-payment at maturity. The agreement gives the note holder the option to convert into a newly created series seed shares using model documentation or explore other options (for example, extension of maturity). This is not mandatory and is decided by the majority of note holders. All KISS investors receive an MFN treatment and major investors (those who invested more than $50,000) receive basic information and participation rights.
Convertible Equity Version
KISS Equity securities have no interest rate and no repayment which is more company friendly. Just like the KISS convertible notes, they automatically convert into equity at the next round of equity financing but only if the financing is for $1 million or more. Like with convertible debt, the convertible equity securities offer the same MFN protection and major investors receive additional information and participation rights. The convertible equity securities are treated on pari passu with other KISS securities and convertible debt securities, including in terms of repayment.
Below are the summary of terms of both the convertible equity and convertible debt versions of the KISS documents. If you would like to generate your own KISS documents Cooley has an excellent KISS document generator here.