Review of 500 Startups KISS Notes

How founder-friendly are they?

I organized a study in 2019 with attorneys who reviewed the six most popular startup financing documents—all of which were produced by investor-funded organizations. After pouring through 298 pages of legalese, the attorneys found the top six financing documents were, on average, only 38% compatible with Founder Friendly Standard. 500 Startups KISS Notes are silent on a number of important issues. See for yourself by viewing our infographic where you can drill down and compare the term sheets.

Review written by Zev Safran of Safran Law on June 25, 2019.

500 Startups KISS Notes are investment templates meant to enable early stage startups to raise money without a lengthy negotiation of legal terms. I reviewed both variants of 500 Startups KISS Notes to write this comparison to Founder Friendly Standard.

When I refer to 500 Startups KISS Notes, I’m talking about both variants.

Section 1.1 of the Founder Friendly Standard says:

Individuals who work for the company and are instrumental in its inception (“Founders”) receive a class of equity such as Common Stock which provides no less than twenty-four (24) votes to one (1) vote of stock held by investors or employees.

500 Startups KISS Notes do not address founder equity.

Section 1.2 of the Founder Friendly Standard says:

Investors receive a class of equity such as Class A Preferred Stock which will have one vote per share with a higher par value justified by a liquidation preference.

500 Startups KISS Notes do not address voting rights.

Section 1.3 of the Founder Friendly Standard says:

Employees and contractors receive a class of equity such as Class B Common Stock which carries one vote per share and does not have a liquidation preference.

500 Startups KISS Notes do not address “sweat” equity issued to employees and contractors.

Section 1.4 of the Founder Friendly Standard says:

The first board consists only of Founders. The term of the board is one year. After the first year, a new board is elected by the equity holders at the annual meeting. Board decisions are made by a majority vote of the board. Board members cast no more than one vote each on any decision. Board committees are disallowed for at least the first two (2) years.

500 Startups KISS Notes do not address board composition or representation.

Section 1.5 of the Founder Friendly Standard says:

New equity of any kind, including stock option pools, dilutes all equity holders equally. Therefore, no investor in the company has anti-dilution rights of any kind.

500 Startups KISS Notes do not meet section 1.5 of the Founder Friendly Standard. Some KISS terms, including the Valuation Cap, grant investors certain anti-dilution rights.

Section 2.1 of the Founder Friendly Standard says:

Founders agree in writing they will give and receive performance reviews at the end of each fiscal quarter for the first four (4) years.

500 Startups KISS Notes do not address performance reviews.

Section 2.2 of the Founder Friendly Standard says:

Sweat equity vests each month over a period of four (4) years with a one (1) year vesting cliff. Vesting begins on the date shares are issued.

500 Startups KISS Notes do not address vesting of sweat equity.

Section 2.3 of the Founder Friendly Standard says:

Founders keep all information confidential and assign the company all intellectual property created within the scope of their work for the company.

500 Startups KISS Notes do not address founder confidentiality.

Section 2.4 of the Founder Friendly Standard says:

Due to potentially devastating tax consequences, the company tells individuals receiving sweat equity in the United States to consult with a tax professional about making an election under Section 83(b) of the Internal Revenue Code. Founders who live or pay taxes outside the United States are similarly advised to consult tax professionals about applicable local and national taxes.

500 Startups KISS Notes do not address sweat equity or IRC Section 83(b) elections.

Section 2.5 of the Founder Friendly Standard says:

Non-compete restrictions only apply to employee or independent contractor agreements and do not survive termination. The company’s bylaws and other investor agreements are either silent on the issue of non-competition or expressly allow competition.

500 Startups KISS Notes do meet section 2.5 of the Founder Friendly Standard because KISS Notes do not include any non-compete provisions. Remember to compare section 2.5 to future agreements including bylaws and shareholder rights.

Section 3.1 of the Founder Friendly Standard says:

For at least the first two (2) years of operations, the company will not agree to pay the legal expenses of any investor as a condition of investment.

500 Startups KISS Notes do meet section 3.1 of the Founder Friendly Standard. KISS Notes do not require the company to pay legal fees except where the company does not comply with the KISS agreement.

Section 3.2 of the Founder Friendly Standard says:

For at least the first two (2) years of operations, the company does not agree to binding arbitration with any investor.

500 Startups KISS Notes do meet section 3.2 of the Founder Friendly Standard. KISS Notes do not include an arbitration requirement or provision for investor disputes.

Section 3.3 of the Founder Friendly Standard says:

For at least the first two (2) years of operations, the company does not agree to binding arbitration with any Founder.

500 Startups KISS Notes do meet section 3.3 of the Founder Friendly Standard. Because KISS Notes do not address founder disputes, they do not require founders to submit to binding arbitration. Remember to compare section 3.3 to future agreements including labor, bylaws, and shareholder rights.

Section 4.1 of the Founder Friendly Standard says:

Upon any transfer or sale of Founders’ super-voting equity, the portion of equity transferred converts to the class of equity described in Section 1.3. This also includes any transfer to a Founder’s estate, spouse, or heirs.

500 Startups KISS Notes do not address founder equity.

Section 4.2 of the Founder Friendly Standard says:

The company has the right of first refusal on any transfer or sale of equity for up to forty-five (45) days, but it cannot veto a transfer or sale. This provision is void after a company’s stock is listed on a public exchange such as the NASDAQ, OTCBB, New York Stock Exchange, etc.

500 Startups KISS Notes do not meet section 4.2 of the Founder Friendly Standard. KISS Notes generally permit transfer of the securities upon notice to the company.

How do 500 Startups KISS Notes compare to Founder Friendly Standard?

500 Startups KISS Notes meet only 4 of the 17 sections of the Founder Friendly Standard (sections 2.5, 3.1, 3.2, 3.3). KISS Notes take the opposite position on 3 of the 17 sections of the Founder Friendly Standard (sections 1.5, 4.2, 5.1).

500 Startups KISS Notes enable investors to convert their investment to equity at a later time but are not direct equity investments. KISS Notes are silent on 10 of the 17 sections reflected in the Founder Friendly Standard (sections 1.1, 1.2, 1.3, 1.4, 2.1, 2.2, 2.3, 2.4, 4.1, 5.2). These sections are left to be determined at the time of conversion to equity or by other corporate documents.

The web is full of opinions about whether Y Combinator’s Safe is more founder-friendly than the 500 Startups KISS. But read Ryan Juliano’s comparison of the Founder Friendly Standard to the Safe, and you’ll see the Safe and the KISS Notes are similar. They kick many issues down the road. How does kicking issues down the road work out for startup founders in your experience?

INFOGRAPHIC: How does Founder Friendly Standard compare to term sheet templates from 500 Startups, Y Combinator, NVCA, Gust, and Sam Altman?

Whether the KISS Notes comply with certain Founder Friendly Standard terms or whether certain terms are applicable to KISS Notes may be a matter of judgment. This answer is not legal advice. Please consult with an attorney to evaluate the specifics of your situation.

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