Navigating convertible instruments for startup funding can be challenging, with SAFE, KISS, and CARE each offering unique advantages depending on a company’s growth stage and regulatory setting. SAFE agreements provide a quick, flexible way to raise early-stage capital without setting a valuation, while KISS adds more structure with options for both equity and debt features. For startups in Singapore, CARE serves as a streamlined solution designed to reduce transactional complexities. Understanding these options helps founders align their fundraising strategies with business needs and local regulations, enabling smarter, more efficient funding decisions.

SAFE vs. KISS vs. CARE: Which One To Choose?

Here is a comprehensive introduction to SAFE (Simple Agreement for Future Equity), KISS (Keep It Simple Security), CARE (Convertible Agreement for Equity), and other convertible instruments.

SAFE contracts

Popularized by Y Combinator, SAFE (Simple Agreement for Future Equity) enable startups to raise funds quickly without setting a valuation.

Overview:

The SAFE is a convertible security that offers a straightforward way for startups to raise early-stage capital. Introduced by Y Combinator in 2013, SAFE agreements allow investors to invest in a company without having to determine a valuation at the time of the investment.

Key Features:

• Valuation Cap: Sets the maximum company valuation at which the investment converts into equity.
• Discount Rate: Provides investors with a discount on the price per share in the next equity financing round.
• Conversion Trigger: Converts to equity upon the occurrence of specific events, such as a future equity financing round.
• No Maturity Date: Unlike convertible notes, SAFEs do not have a maturity date or accrue interest.

Use Cases:

• Ideal for early-stage startups looking for a flexible and quick way to raise funds.
• Commonly used in pre-seed and seed funding rounds.

KISS contracts

Similar to SAFE but slightly more complex, KISS (Keep It Simple Security) include investor-friendly terms like a valuation cap and discounts.

Overview:

KISS agreements are similar to SAFEs but include more detailed terms and conditions. Created by 500 Startups, KISS agreements provide a middle ground between SAFEs and traditional convertible notes.

Key Features:

• Two Variants: Comes in debt version (with interest and maturity date) and equity version (similar to SAFE).
• Valuation Cap and Discount Rate: Like SAFEs, KISS agreements often include a valuation cap and discount rate.
• Interest Rate: The debt version accrues interest, providing investors with additional compensation.
• Maturity Date: The debt version includes a maturity date, upon which the investment must be repaid or converted into equity.

Use Cases:

• Suitable for startups and investors who prefer more structure than SAFEs but still seek simplicity.
• Often used in seed funding rounds where both parties want clear terms regarding interest and repayment.

Other Convertisble Instruments

Convertible debt instruments, including convertible notes, offer a structured pathway for debt to transform into equity upon certain events, such as future financing rounds. These instruments typically include interest rates and maturity dates, adding a layer of complexity compared to SAFEs and KISS notes. They are suitable for more structured investment scenarios where both the investor and the company prefer predefined terms regarding interest, maturity, and conversion triggers.

These convertible instruments are gaining popularity in the region due to their simplicity and flexibility. They cater to the fast-paced startup ecosystem and are generally accepted within the legal frameworks of Singapore and several Southeast Asian countries. An example is the Convertible Agreement Regarding Equity (CARE), designed to streamline early-stage financing in Singapore.

CARE agreements

CARE (Convertible Agreement Regarding Equity) is a convertible instrument designed specifically for early-stage financing in Singapore. It aims to reduce transactional costs and time, providing startups with an efficient way to raise capital. CARE incorporates elements from SAFE, adapting them to the local legal and business environment to ensure greater finality and transparency.

Overview:

CARE is a convertible instrument allowing investors to invest cash in a company in exchange for cash or shares upon specific events. Commonly used in Singapore, CARE agreements streamline the funding process, reducing the need for extensive legal and commercial negotiations.

Key Features:

• Conversion Events: Converts into equity or cash upon predefined events, such as future financing rounds or company sale.
• Simplicity and Efficiency: Designed to be issued quickly and efficiently without multiple complex documents.
• Flexibility: Provides flexibility to both investors and startups, accommodating various scenarios for conversion and repayment.

Use Cases:

• Ideal for startups looking for quick and straightforward funding options.
• Suitable for early-stage investments where both parties seek flexibility and reduced negotiation time.

Advantages of Using Convertible Instruments

For Investors:

• Potential for higher returns
• Flexible terms
• Reduced immediate risk

For Startups:

• Delays valuation discussion
• Simplifies the fundraising process
• Attracts early-stage investors

Disadvantages of Using Convertible Instruments

For Investors:

• Lack of immediate equity ownership
• Potential for less control over investment terms

For Startups:

• Future dilution of equity
• Uncertainty in ownership structure

Comparing SAFE, KISS, and Convertible Debt

Vinay highlighted how all of these instruments are widely used across Southeast Asia, offering flexible funding solutions for startups.

Regulatory Framework in Thailand

David D Doran, Founding Partner and Head of DFDL’s Thai practice, focused on new legal developments in Thailand concerning the use of convertible contracts. A key topic was the Thai PP-SME (Private Placement for Small and Medium Enterprises) framework, designed to facilitate funding for SMEs through private placements to accredited investors. This framework is particularly advantageous for startups in Thailand, as it offers a viable alternative to SAFE and KISS agreements, which are not permissible under Thai law.

Understanding PP-SME

Thailand’s PP-SME scheme offers a fundraising alternative for SMEs, allowing businesses to issue shares or convertible bonds (CDs) to a limited number of investors without the need to submit a request for permission or a registration statement to the SEC. This makes the process more efficient and less cumbersome compared to traditional fundraising methods. Key regulations include:

• Securities and Exchange Act B.E. 2535 (1992)
• Small and Medium Enterprises Act B.E. 2543
• Ministerial Regulations and Exemptions (various dates)

Key Components and Limitations

The regulatory environment sets clear limits on issuers, investment amounts, and investors. For instance, SMEs must adhere to specific criteria regarding annual income and employment size, while investment limits and investor qualifications are strictly defined.

Process Requirements

1. Register with the OSMEP website
   On their website, you can also check the list of businesses participating in the project.
2. Prepare an SME Factsheet
   Summary of business operations, risks, and related important information for investor consideration.
3. File any transfer restrictions with the SEC
   For CD offerings, register transfer restrictions for each CD offering with the SEC.
4. Report sales and conversions to the SEC within 15 days
   For the results of the sale of securities to the SEC within 15 days from the closing date of the offering, and for the results of exercising CD conversion rights to the SEC within 15 days from the date the conversion rights are exercised.
5. Advertise only to qualified investors

Investor Protection

Given the inherent risks associated with early-stage businesses, the SEC has established investor protection measures:

• Institutional Investors: No credit limit and an unlimited number of investors.
• Directors and Employees: No credit limit and an unlimited number of investors.
• Other Investors: For medium and large enterprises, the fundraising limit is not more than 50 million baht (including stocks and CDs) with no more than 10 investors (including stocks and CDs).

Versatility of PP-SME

Convertible instruments are versatile, suitable for various fundraising stages from family and friends to pre-series A rounds. For instance:

• Family and Friends: Simple debt or LLC-CD (Limited Liability Company Convertible Debt)
• Angels: Thai LLC-CD or Thai PLC SAFE/KISS
• Seed/Pre-Series A: Thai PLC SAFE/KISS or LiVEx setup

Case Studies and Examples

1. Family and Friends Round:

• Simple Debt: May be the best option for its simplicity and minimal risk.
• Equity: Often considered too early for valuation.
• LLC-CD: Acceptable risks and straightforward execution.
• Thai PLC SAFE/KISS: Generally too complex for early informal rounds.

2. Angel Investors:

• Equity: Typically considered too much too soon.
• Debt: Often not preferred by investors looking for equity upside.
• Thai LLC-CD: An acceptable risk for the size of investment.
• Thai PLC SAFE/KISS: Provides a balance between simplicity and investor protection.

3. Seed/Pre-Series A:

• Simple Debt: Making a comeback but may not be attractive due to interest requirements.
• Equity: Hard to value at this stage.
• Thai LLC-CD: May present unacceptable risks.
• Thai PLC SAFE/KISS: Potentially the best option due to balanced complexity and protection.

4. Bridge Financing:

• Simple Debt: Unlikely at a reasonable interest rate.
• Equity: Very possible as valuations become clearer.
• Thai LLC-CD: Often seen as too risky.
• Thai PLC SAFE/KISS: Good option providing needed structure and protection.

Benefits of PP-SME

1. Simplified Process: Avoid extensive regulatory filings, reducing the complexity of the fundraising process.
2. Cost-Effective: Lower costs associated with raising capital, making it accessible for startups and SMEs.
3. Flexibility: Suitable for both small startups and larger enterprises looking to scale.
4. Investor Confidence: Ensures a secure and transparent method for raising capital, enhancing investor trust.

Why Choose PP-SME?

• Efficiency: The process is designed to be quick and efficient, allowing businesses to focus more on growth and less on regulatory hurdles.
• Regulatory Support: The SEC’s guidelines ensure that while the process is simplified, investor protection is not compromised.
• Growth Potential: By providing a viable funding solution, PP-SME helps startups and SMEs overcome financial barriers, facilitating continuous growth and innovation.

Conclusion

By providing a structured and legal way for startups to secure investment, the Thai PP-SME framework aligns with global practices and boosts investor confidence, making it a crucial development for the Thai tech ecosystem.