What Do You Need to Know About Convertible Equity for Your New Business?

Convertible equity is a type of financing that gives investors the option to acquire preferred stock when a specified triggering event takes place. It was created as a substitute for convertible notes. Some people think convertible debt is bad for startups because it forces the companies to pay back the money they borrowed plus interest if they don’t raise the money expected to cause the notes to convert to equity. The business might be forced into bankruptcy if it is unable to pay back the notes.

Contrarily, convertible equity does away with the interest and repayment components of convertible notes, allowing the business to avoid starting out with potential debt. The SAFE and the KISS are two examples of convertible equity.

SAFE

The simple agreement for future equity (SAFE) is a straightforward security rather than a type of debt. When any amount of equity investment is raised in later funding rounds, it enables the investor to convert the investment into equity. As opposed to convertible notes, which have a maturity date, there is no requirement for repayment and it is possible that the investment never converts to equity.

KISS

The Keep It Simple Security (KISS) is a straightforward investment document created to provide the SAFE’s flexibility and some of the investor protections found in convertible notes. Unlike SAFEs, KISSes have set maturity dates after which the investor may convert the investment amount, plus accrued interest, into preferred stock. They also offer accrued interest at pre-agreed rates. The KISS is frequently viewed as a compromise between convertible debt and the SAFE.

Alvarez & Diaz-Silveira LLP is a corporate law firm in Miami, focusing on international and domestic M&A, finance, real estate and corporate immigration. If you or your business needs legal advice, contact an M&A Attorney in Miami for help.