A Convertible loan note, a kiss or a safe: How do I choose?

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The Convertible Loan Note started it all and the KISS and SAFE followed. All three financing methods are used by seed investors as they are relatively simple can be put in place relatively quickly at minimal expense. A Convertible Loan Note is faster than a more traditional route of a priced equity funding round but still has terms for negotiation. The creators of the KISS and SAFE documents both had the same ambition: to simplify the seed financing process by creating standard form documentation. Standard form documents mean there are less points to negotiate between founders and investors – so the documents can be put in place, and the startup receives the funds, faster.

If they are both designed to achieve the same result, how do you choose between them? They were prepared by different organisations (the KISS by 500 Startups and the SAFE by Y Combinator) with their own preferences and aspirations so there are differences in documents. And how does a KISS and a SAFE compare to a Convertible Loan Note?

We’ve set out the key features of each instrument, and the differences between them, in the table below:

	Convertible Loan Note	KISS	SAFE
Versions	Various	• Equity: Cap, Discount, no interest, no repayment • Debt: Cap, Discount, accrues interest, repayable at maturity	• Cap, no Discount • Discount, no Cap • Cap and Discount • MFN, no Cap, no Discount
Valuation cap	Possibly – depends on the terms of the Convertible Loan Note.	Yes	Possibly – depends on the form of SAFE.
Discount	Possibly – depends on the terms of the Convertible Loan Note).	Yes	Possibly – depends on form of SAFE.
Equity funding round	Option to: • convert to ordinary shares at lesser of cap or discount (if applicable); or • get paid back the original investment (with or without interest).	• Converts automatically to preferred stock when an equity round of new money above a specified amount occurs. • Conversion price is lesser of valuation cap or discount.	• Converts automatically to preferred stock when an equity round of any size occurs. • Conversion price is lesser of valuation cap or discount (if specified in the SAFE document).
Sale of company	Option to: • convert to ordinary shares at the cap; or • get paid back the original investment (with or without interest)	Option to: • convert to common shares at the valuation cap; or • get paid a multiple on the original investment. Some KISSes provide an option for repayment.	Option to: • convert to common shares at the valuation cap; or • get paid back the original investment.
Maturity	Get paid back the original investment.	Converts to preferred shares at the valuation cap.	N/A.
Most Favoured Nation Clause (i.e. preferential rights for Investor)	Optional.	Yes.	No – a standard SAFE does not but one may be included (where no valuation cap or discount specified).
What other rights do Investors have?	Various (as set out in the terms of the Convertible Loan Note).	• Basic information rights to company financials (major investors) • Participation rights in all future equity funding rounds	Participation right after the next equity funding round.
What representations does the company give?	Basic set of representations, plus intellectual property & litigation ones.	Basic set of representations and warranties, plus intellectual property and litigation ones.	Basic set of representations, plus intellectual property ones.
High Resolution Financing (i.e. different terms for different investors)	Yes (unless explicitly prohibited).	No. All KISSes in each series have identical terms.	Yes.
Can the Investor transfer the instrument?	Yes – typically investor may transfer Convertible Loan Note to its affiliates only.	Yes – investor may transfer KISS to any person.	Yes – investor may transfer SAFE to its affiliates only.