Is Convertible Equity (SAFE/ KISS) Really Better Than Convertible Debt – For Japanese Investors? (コンバーティブル・エクイティ(SAFE/KISS)はコンバーティブル・デットより良いか?-日本の投資家にとって)



    Hi.  It’s John Sasaki again.

    Ichigo made a new friend today.

    A while back I wrote about the popularity of convertible note financings, as an alternative to straight equity financings.

    Recently I’ve received a number of questions about Simple Agreements for Future Equity (SAFE) or Keep It Simple Security (KISS), otherwise known as convertible equity, as an alternative to convertible debt in early stage financing.  It appears that there have been some articles promoting convertible equity as better than convertible debt.

    But most of these articles are written from the perspective of the company.  What about for Japanese investors?  Is convertible equity really a better choice than convertible debt for Japanese investors in early stage financing?

    Well, let’s take a look at some of the reasons that are given as to why convertible equity is better than convertible debt, and see if those reasons apply to Japanese investors.

    1. Convertible equity does not need to be repaid
        (i.e., there is no maturity date).

    One reason given as to why convertible equity is better than convertible debt is that convertible debt is repayable, while convertible equity is not.  In other words, convertible equity does not have a maturity date.

    Well, clearly this is a reason for the company to desire convertible equity over convertible debt, and not the investor.

    For the investor, convertible debt provides more flexibility.  If the company successfully raises equity financing in the future, then the note generally converts into equity anyway.  On the other hand, if the company is not successful, the company must repay the note.  At that point, the investor can either exit its investment, or it can negotiate an extension of the note.  Or the investor can still convert it into equity at that time, based on negotiations with the company.  The point is that the investor has options.

    If the investment is in the form of convertible equity, and if there is no next financing (and no other exit event), you are stuck.  You cannot exit your investment.  And you have no rights as a stockholder.  So, how can this be good for you if you are an investor?  It’s not.

    2. Convertible equity is not subject to interest payments.

    Another reason given as to why convertible equity is better than convertible debt is that convertible debt is subject to interest, while convertible equity is not.  In addition to the cost of the interest (to the company), calculating the interest at the time the note converts (or upon repayment of the note) is complicated.  And, if the interest is converted into equity, the interest results in further dilution to the other stockholders.

    Well, this is also great for the company, but why would the investor want to forego the interest payments?  It wouldn’t.

    3. Convertible equity has simpler documentation with simpler terms.

    In a convertible equity financing, there is generally only one document, which is the SAFE or the KISS itself.  In a convertible note financing, there are typically two documents: (i) the Note Purchase Agreement (NPA); and (ii) the Convertible Promissory Note (Note).

    Also, convertible equity generally only has two variable terms, at most: (i) the discount; and (ii) the valuation cap.  As mentioned above, there is no maturity date or interest.  There is also no event of default provision.  And the conversion is based on any equity financing, not a “qualified” equity financing.

    So, nominally, a convertible equity financing has simpler documentation with simpler terms.

    Also, both the SAFE and KISS are standard forms, developed by Y Combinator and 500 Startups, respectively.  So, all SAFE financings seem to be negotiated based on the same forms.  On the other hand, convertible note financings are not standardized to the same extent as convertible equity financings.  So, in this respect, convertible equity negotiation is simpler.

    But, at least in my experience, the variations in typical convertible note documents are relatively limited.  So I’m not sure that simpler documentation and/or simpler terms is a determinative reason to choose convertible equity over convertible debt.

    4. Too much debt may make it harder for the company to do business.

    If the company has too much debt, it may be harder for the company to obtain bank financing and in some cases to be able to enter into business partnerships with certain companies.

    Assuming this is true, this could have an adverse effect on investors as well as companies.

    But is this true?  In some cases, probably it is.  But I would guess that it would depend on the amount of the debt.  If the outstanding note amount is a few hundred thousand dollars, and the notes are automatically convertible upon an equity financing of a certain threshold, and the threshold is not very high, then it might not have any effect.  On the other hand, if the note financing is for millions of dollars, it might have an effect.

    So, this is a factor that Japanese investors should consider in structuring their note financings.  But it doesn’t necessarily dictate convertible equity over convertible debt.

    5. Convertible debt may subject investors to licensing requirements.

    A final reason given as to why convertible equity is better than convertible debt is that convertible debt may subject the investor to lender licensing requirements under applicable state law.  Convertible equity is equity, and so would not expose the investors to lender licensing requirements.

    This should clearly be a concern for investors.

    However, in general, lender licensing requirements apply only to investors based in the applicable state (or at least those with significant business in the state).  In addition, states may have exemptions to the licensing requirements, which may be based on the nature of the loan, the term of the loan or the frequency of the transactions.  For example, California has an exemption based on the frequency of the loans, as well another exemption based on other factors, such as the purpose of the loan and the term.

    So, even if you are worried that the lender licensing requirements may apply to you, you can resolve the concern by structuring the loan to fall under a relevant exemption.

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    So, does this mean that Japanese investors should never invest in convertible equity?  No, I don’t think so.  There are certain circumstances where it may make sense for Japanese investors to use convertible equity over convertible debt.

    For example, I suppose if the amounts are relatively small, the investor wouldn’t care about repayment or interest.  And it’s probably fair to say that the original investment amounts by Y Combinator and 500 Startups into their portfolio companies are relatively small.  At that point, it probably doesn’t make sense to spend a lot of time, money and effort on negotiating a maturity date, an interest rate and a threshold for a qualified financing.  And it probably is also not worth the effort to calculate the interest amounts.

    However, in most cases, I would guess that convertible debt is the more appropriate instrument for Japanese investors in early stage investments.

    If you have any questions, please feel free to contact me at





    最近、アーリーステージのファイナンスにおけるコンバーティブル・デットの代替として、Simple Agreements for Future Equity (SAFE)とKeep It Simple Security (KISS)について(これらはコンバーティブル・エクイティとも言われています)の質問を多く受けました。コンバーティブル・エクイティを、コンバーティブル・デットよりも良いものとして推奨する記事もあったようです。












    コンバーティブル・エクイティによるファイナンスでは、通常SAFE又はKISSというドキュメントしかありません。コンバーティブル・ノートによるファイナンスの場合、(i)Note Purchase Agreement (NPA)と(ii) Convertible Promissory Note (Note)の2種類のドキュメントに通常なります。



    また、SAFEもKISSも、Y Combinatorと500 Startupsがそれぞれ作成した雛形があります。よって、全てのSAFEによるファイナンスは同じ雛形をベースとして交渉されます。一方、コンバーティブル・ノートによるファイナンスは、コンバーティブル・エクイティほどには雛形化されていません。この点で、コンバーティブル・エクイティの交渉がよりシンプルです。












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    例えば、金額が比較的小さい場合、投資家は返済や利息を気にしないと思います。Y Combinatorや 500 Startupsの投資先に対する初期投資額は比較的少額であると言って、おそらく間違いないでしょう。その時点で、満期日、利率や適格ファイナンスの要件の交渉に多くの時間、お金と労力をさくのは、多分意味がないでしょう。おそらく、利息の金額を計算する手間ももったいないでしょう。



    【参考和文作成:弁護士 林 賢治】


    AZX Professionals Group
    AZX Professionals Group
    税理士 パートナー
    佐瀬 和宏
    Sase, Kazuhiro
    AZX Professionals Group
    弁護士 パートナー
    池田 宣大
    Ikeda, Nobuhiro