With all the learnings gathered after making more than 60 investments with our first fund and the recent launch of the second one, we wanted to rethink our terms and conditions and, as we did with the first versions, make them public.
At K Fund we are flexible to invest through capital increase (equity rounds) and convertible notes. That’s why we’ve decided to share both documents; as you’ll see, there are slight differences between the two depending on the circumstances of the deal and the company.
Equity rounds: comments and news on our term sheet
The essence of our term sheet for equity rounds is pretty much the same as the one we first published a couple of years ago. However, and based on feedback we received from both founders and other investors, we’ve introduced a few changes which we thought we’d highlight below:
- Option pool creation, before or after the round? If the purpose of the pool is to compensate existing employees, we understand the options should have been created before our investment. Otherwise, if it’s for future additions, we’ll assume the corresponding dilution. If the pool is needed for both purposes (existing and future employees), we’ll fix it by mutual agreement.
Having said that, we are increasingly seeing cases of employees that value more cash than options. Thus, we always encourage founders to think about it before any distribution. Do they understand the upside of having options? Will they leave if someone gives them more money although they have options?
- Do your due diligence on us. We believe the due diligence process should be mutual. We like founders who spend time asking other portfolio companies what working with us looks like, in both good and bad moments. That’s why we are sharing the list of all our founders so that people can ask them directly without the need of asking us for an intro.
- Legal expenses are on us. It’s a common practice to charge the legal expenses generated due to the financing round to the company (documentation drafting, negotiation, etc). In fact, we’ve done it for a long time. In rounds in which there is more than one investor participating (lead and followers normally), the sum of legal expenses of each party can be very high, something that obviously founders do not like very much.
From now on, we’ll cover our own legal expenses, excluding those expenses associated with the due diligence, since we believe it’s something that benefits the company in the long term. It’s a pleasure to welcome Cristina Garcia-Margallo to the K Fund team. She’ll be the person in charge of any legal matter within the fund.
- Important decisions need to be agreed upon among the main parties involved. We take minimum stakes in the companies we invest in (20% at most). That’s why we need some mechanisms to make sure that those decisions that can have a significant impact on the company’s continuity or our position (e.g. modification of the management body, capital increases, structural modifications, etc) are agreed upon taking into account our opinion.
- 1x non-participating liquidation preference after the “Kolchón”. We keep the Kolchon as a new type of liquidation preference to reward founders and previous investors in case the company is sold with a low valuation. For founders, this means receiving a fixed amount of money with priority over the investors. By doing this, we compensate them for the risk taken in the early days and let them start their life or a new company again. For previous investors (mainly FFF or business angels), it means sharing the 1x with them.
And for the avoidance of doubt, a liquidation preference (and therefore the “Kolchon”) only takes place if the net compensation obtained does not allow the investors to recover the amounts that each of them would have paid for their shares.
Here you can read and download our TERM SHEET (EQUITY ROUNDS) template.
Convertible notes: comments and news on our term sheet
We’ve done multiple investments through convertible notes since launching K Fund five years ago. We believe that, in some circumstances, it makes sense to use them. If you’re not familiar with how notes work, I suggest you read these two posts by my colleague Pablo Ventura about convertible notes, when to use them and the implications they have for founders and investors.
Our convertible note term sheet follows the same philosophy as the one we use for equity rounds, but please find below some comments from us on certain aspects included in such term sheet:
- Post-money cap instead of pre-money. Post-money caps help everyone better understand ownership and dilution. Apart from that, it fosters founders and current shareholders capitalize loans sooner, avoiding having several accumulated loans with different terms and conditions that make all shareholders (including the founders) have doubts about their specific stakes in the company.
- Interests equal to zero. Our business is not charging interests to companies. Thus, we’ve added a formula that makes interest equal to zero without the loan losing its legal nature (participative loans).
- Convertibility of the notes as a goal. Our business does not consist of lending money to be repaid later. Our goal will always be to convert the loans into company shares, regardless of whether there’s a round or not.
- Extension of maturity date in case of receiving public funding. We always encourage companies to look for public funding. However, when there’s no full agreement with the cap in the initial negotiations, we set two caps, a cap if a round is raised and a lower cap if not.
In order to not penalize the company with a higher dilution, we’ll extend the maturity date if the company has received public funding and thus postpone fundraising for a few months. With this, we give the company more time so that founders can benefit from better conversion terms.
- 1x- non participating liquidation preference after the “Kolchón”.We add this as part of the convertible terms and conditions to make sure the same rules are applied if the company is sold with a low valuation.
- Legal expenses are (also) on us. As with equity rounds, we’ll cover our own legal expenses.
Please read and download our TERM SHEET (CONVERTIBLE NOTES) template.
If your company has been chosen by K Founders to be part of our pre-seed investment program, we’ll use the same convertible note terms and conditions although we’ll remove the 1x non-liquidation preference to be totally aligned with the stage and the founders.
Additionally, If your company only has some months of life and has not had time to incorporate the company and/or sign a shareholders agreement among the founders (as conditions to close our investment), we’ll be happy to help you with it, sharing some templates and advising you throughout the process.
Most of these terms and conditions have been the result of many conversations with founders and lawyers. Please, don’t stop suggesting us changes and ideas, and do not hesitate to contact us at firstname.lastname@example.org if you have any doubt or questions.