In 2013, Y Combinator introduced the Simple Agreement for Future Equity (SAFE) for emerging growth companies. As an alternative to convertible notes, the SAFE became a standard document that was short, simple, and very founder-friendly, while being fair to investors putting checks into ventures that were just starting out and so were extremely risky.
While it originated in the US, it became widely popular in other markets. SAFE transformed the startup world. But many Brazilian founders were left in the dark and were unable to capitalize on this transformation.
The reality was that a standard document created for US companies wouldn't work for startups operating inside Brazilian borders, subject to Brazil's unique and complex regulations.
These early-stage entrepreneurs must then navigate the hundreds of different templates used for startup investments in Brazil – riddled with complicated language, harmful clauses, and, on more occasions than we'd like to admit, shaky legal premises that could generate devastating consequences for follow-on investment and the startup's future in general, without a market standard to be followed.
What if getting first checks wasn't this long, complex, and painful process anymore? Founders would have more time to nurture their businesses, present better results to their investors, and eventually become just a few out of many successful tales of national startups winning over the world.
Together, Latitud, Gunderson Dettmer, Pinheiro Neto, and Bronstein Zilberberg Chueiri & Potenza Advogados (BZCP) partnered up to take that matter into our hands – and give these founders and investors the standard (yet specific) investment instrument they deserve. Arnobio Morelix (Sirius Education), Sebrae Startups, ABStartups, ACE Ventures, and Veirano Advogados also joined us as supporters of that same mission.
We're now launching an open-source convertible loan (mútuo conversível) template that's tailor-made for Brazilian early-stage founders and investors. And in true Brazilian fashion, we decided to call this financing document MISTO (Mútuo para Investimento Simplificado com Termos Otimizados).
In summary, MISTO gives a new and improved flavor to the mútuo conversível – the common contract early-stage founders and investors sign to turn debt into equity in due time. By new flavor, we mean bringing the benefits Brazilian founders on the venture capital track have been wanting ever since SAFEs were launched in the US.
MISTO both simplifies the very early days of startups and whatever comes next. The template makes it easier to get the first check in, negotiate future rounds, and eventually update the corporate structure. We also spent months polishing the document, word by word, to make sure the language was accessible to founders not fluent in legalese.
Here's how the MISTO is different:
While there are a few open-source templates, they are hard to trust. But MISTO was built in collaboration with law offices Gunderson Dettmer, Pinheiro Neto, and BZCP, and supported by Brazilian law firms active in the startup ecosystem, such as Veirano. The MISTO is also accompanied by an instruction manual teaching you how to fill in the blanks, alongside the necessary corporate documents for your company to approve the investment.
TL;DR: You won’t need to spend a dime on legal fees to raise your first round.
Convertible loans (mútuos conversíveis) often carry interest, while SAFEs don't. But having to pay more money in the form of taxes isn't even the biggest issue.
First: with interest rates, the investor's share in the startup is constantly updated and the company's cap table becomes unpredictable. Who owns what becomes an ever-changing answer.
Second: interest rates add an extra layer of complexity when startups want to change their corporate structure. It's oftentimes a mandatory step to keep the company growing, and interest adds more work, time, and money spent on it. All things startups don't need more of.
To the best of our knowledge, no mútuo conversível out there got rid of these interest rates.
Well, we just did: the MISTO has no interest rates attached to it.
Convertible loans (mútuos conversíveis) often include control clauses, such as veto rights over subsequent funding rounds and mandatory board seats. We believe those constraining terms work against everyone’s best interests, including investors.
Unfriendly terms can (and historically have) end up backfiring in co-investment scenarios. When many investors have access to the same ample rights, one person can derail an entire deal that looked beneficial to the company and all the other investors. Follow-on investments get harder to negotiate and more expensive to formalize.
Founders who should be hustling to get to product-market fit spend their time working through red tape. In the end, this hurts the growth and profits that investors also want to see.
The MISTO offers early-stage startup founders friendly terms that up until now were seen only in SAFEs. Founders now have more liberty to pay closer attention and evaluate these clauses with more care.
Friendly terms can de-risk co-investment and, with that, make follow-on rounds easier for everybody. As the wise say: valuation is temporary, control is forever.
In convertible loans (mútuos conversíveis), both the interest rates and the usually unset valuation cap make it difficult for founders and investors to predict how the cap table will look in the future.
Startups are already full of variables, and that's not one we'd like to add to the list. So MISTO adopts the same post-money economic model that the SAFE proposes, which is internationally acclaimed.
Finally, MISTO also allows for easier changes in the startups' corporate structure. MISTO is made for Brazilian startups that are structured as Limitadas or Sociedades Anônimas.
Founders use these structures to incorporate their companies locally, hire employees, and go on to generate a profit. But when it's time to raise from top VCs, they might need to set up an offshore structure, such as a Delaware Tostada or a Cayman Sandwich. MISTO thought of that and included a pre-approval of that rebuild (known as a flip).
The MISTO also makes it so that, when founders do their flips, there are no additional taxes on the capital they've raised. Investors don't have to pay capital gains tax over the accrued interest as they would in the traditional convertible loan (mútuo conversível), nor over the entire investment sum as a SAFE demands.
Here's a summary of how the MISTO compares to the current investment documents available to Brazilian startup founders:
We encourage users to have their legal advisors review our documents, but we believe it offers a starting point that can be utilized in most cases without modifications. Our confidence in this stems from our extensive experience in assisting numerous companies with fundraising each year, and from the valuable feedback received from founders, investors, lawyers, and accountants who have been involved in reviewing all iterations of the document.
And while MISTO may not be suitable for every financing scenario, the terms aim to set a new standard for a fair balance between the interests of founders and investors. We hope the MISTO can make the boring part of fundraising flow on autopilot so that both sides can focus their time and money on what really matters: if they're the right fit for each other and how they can work together to drive impact and results.
That's especially important for early-stage entrepreneurs. They need the most help, and MISTO provides a healthier soil in which they can plant their seeds. After the first harsh months, these seeds not only flourish but also help to pollinate the rest of the garden. Brazil's known for its rich ecosystems – and we'll together add the startup ecosystem to that list.
MISTO was created to serve the Brazilian startup ecosystem. Just like open-source software, harnessing the power of our collective minds will make sure that it’s in the best shape it can be. If you have any feedback and would like to collaborate, shoot an email to firstname.lastname@example.org with your comments. We’ll be happy to go over them and incorporate whatever relevant feedback we get!
Latitud, Gunderson Dettmer, Pinheiro Neto, and Bronstein Zilberberg Chueiri & Potenza Advogados (BZCP)
With the support of Arnobio Morelix (Sirius Education), ABStartups, ACE Ventures, Sebrae Startups, and Veirano Advogados