Key Points to Check in Investment Contracts with J-KISS (Japanese KISS)

J-KISS is a system that enables easy and quick fundraising for startups in their seed stage. Coral Capital (formerly 500 Startups Japan), which popularized J-KISS in Japan, has created a template for contracts under the supervision of professionals such as lawyers and made it available for free. When raising funds using J-KISS, you will generally enter into a contract with investors using this contract template. Therefore, understanding each clause of the contract template is essential to use J-KISS. In this article, we will explain the main clauses in the J-KISS contract template.

J-KISS Investment Contracts

In typical startup fundraising, two types of contracts are concluded: a investment agreement between the investor and the startup, and a shareholder agreement between the investor and existing shareholders, such as the founders. As a result, the contracts tend to be lengthy, which can make the negotiation process costly.

The J-KISS investment agreement provides a simplified contract template, minimizing the clauses that need to be customized for each case. Therefore, using J-KISS can reduce the cost of contract negotiations and enable quick and easy fundraising. For startups in the seed stage, which are the target of J-KISS, completing fundraising quickly and getting started on necessary system development is crucial for future business growth. This is a significant advantage of using J-KISS.

Key Points in J-KISS Investment Contracts

Let’s take a look at the important clauses in the J-KISS investment agreement template publicly available from Coral Capital. In the clauses, “the Company” refers to the startup receiving the investment, and “the Investor” refers to the venture capital firm or similar entity making the investment.

Allocation of Stock Options

Article 2.1 (Allocation and Subscription of the Stock Options)
In accordance with the provisions of this Agreement, on the Payment Date, the Investor shall subscribe for and accept [●] of the Stock Options (hereinafter referred to as the “Subscribed Stock Options”), pay [1,000,000] yen per Stock Option to the Company, and the Company shall allocate and issue the Subscribed Stock Options to the Investor.

In J-KISS, the investment target is not the startup’s shares but its stock options. Therefore, the number of shares that the investor will hold at the time of concluding the investment agreement is not determined. It is simply a format of investing in stock options equivalent to the investment amount. In the template above, the number of stock options can be decided at will, but unless there are special circumstances, it is acceptable to have one stock option. Also, the amount of the stock option is set at 1 million yen in the template, but this can also be set at will according to the investment amount agreed upon with the investor.

Representations and Warranties

The representations and warranties clause in an investment agreement is a clause where the contracting parties represent certain facts to each other and guarantee their content. Originally derived from Anglo-American law, it is frequently used in corporate transactions such as M&A in addition to investment agreements.

In the J-KISS template, the following are stipulated as representations and warranties by the startup:

• Incorporation and Existence
• Authority
• Solicitation of Acquisition
• No Conflict
• Issuance of Conversion Shares
• Intellectual Property Rights
• Litigation
• Anti-Social Forces, etc.
• Disclosure

On the other hand, the following are stipulated as representations and warranties by the investor:

• Authority
• Genuine Acquisition
• Investment Experience
• Anti-Social Forces, etc.

The representations and warranties clause in the J-KISS investment agreement is not as complicated as those in general equity investment agreements. The key point is the “Incorporation and Existence,” where the startup represents and warrants that it exists as it has explained to the investor and is actually conducting business. Especially for seed-stage startups, which are the target of J-KISS, the business may not have started yet, and the investor’s investment decision may have to rely to some extent on the startup’s own declaration. Therefore, it is very important to guarantee that there are no falsehoods in the startup’s explanation.

By the way, “Authority,” “Solicitation of Acquisition,” “No Conflict,” and “Issuance of Conversion Shares” all guarantee that the issuance of stock options and their subsequent conversion into shares are legal in light of various laws and internal regulations.

Most Favored Nation Clause

If this investor determines that subsequent securities or subsequent investment contracts contain terms more favorable to the issuer or grantee of the subsequent securities or to the third party who has entered into a subsequent investment contract with this company than the terms of this warrant or this contract, the investor may, at its option, (i) amend the terms of this contract to include terms identical to those terms, and/or (ii) demand that the company exchange the underwritten warrant for subsequent securities.

The Most Favored Nation clause in an investment contract stipulates that if a more favorable fundraising occurs after the investor has made an investment, the investment portion of that investor can be changed to the same conditions as the more favorable fundraising.

Generally, early investors take on more risk, so it is thought necessary to protect their profits through the Most Favored Nation clause. However, if there is a Most Favored Nation clause, startups that receive investment will need to change the contract terms with existing investors every time fundraising occurs, which requires administrative effort. This point should be noted.

Major Investor Rights

In J-KISS, investors who invest a certain amount or more are defined as “major investors”, and there are clauses that stipulate rights granted only to major investors. The definition of a major investor in the J-KISS contract template is set at 5 million yen or more, but this can be changed at will depending on the case. In J-KISS, the rights granted only to major investors are the right to request information and the right to preferential subscription.

Right to Request Information

(a) The Company shall, as promptly as possible (but no later than 30 days after the end of each first to third quarter of each fiscal year or 90 days after the end of each fiscal year), deliver the Financial Statements, etc. to the Major Investor when requested by the Major Investor. The Financial Statements, etc. must be reasonably detailed and prepared on a consistent basis.
(b) In addition to the preceding paragraph, the Company shall disclose to the Major Investor the information related to the Company’s financial condition and business operations that the Major Investor reasonably requests from time to time.

In the J-KISS contract template, the information that major investors can request for disclosure includes financial statements and other information about the financial condition and business operations. This information is important for investors’ investment decisions. Therefore, investors who invest a certain amount or more are granted the right to request information.

Preferential Subscription Right

(a) If the Company intends to solicit persons to underwrite or receive the grant of the Shares, etc. (including solicitation in the next equity financing or any solicitation before that, but excluding the issuance of stock options), it shall notify the Major Investor in writing of the fact of such solicitation and the payment amount and conditions of the Shares, etc. related to such solicitation, no later than 10 business days before the date of determination of the allotment. In this case, the Major Investor has the right to underwrite or receive the grant of the Shares, etc. under the same conditions as other investors participating in the solicitation, up to the total payment amount for the Shares, etc. underwritten or granted based on this paragraph, until the participation limit amount is reached, in one or more solicitations.

The preferential subscription right is a right that allows investors to request preferential allocation of shares so that they can maintain their own shareholding ratio at the time of the next capital increase. In venture investment, it is common to raise funds multiple times according to the growth stage of the company. However, if an investor only invests in the first round, their shareholding ratio will decrease each time the number of issued shares increases. Since the shareholding ratio is proportional to the influence on the management of the company, it can be said that it is not desirable for investors. Therefore, the preferential subscription right is a measure to consider the interests of such investors.

However, in J-KISS, the investor’s shareholding ratio is not determined until the warrant is converted. Therefore, in J-KISS, it is stipulated that you can make additional investments up to a certain amount, which is defined as the “participation upper limit amount” in the template, at the time of the next fundraising.

Warrant Issuance Terms (Appendix)

The details of the warrants to be issued to investors are described in the separate issuance terms. The issuance terms stipulate basic matters such as the number of warrants, the payment amount, and the allotment date, as well as the method for calculating the conversion price of the warrants. The method of calculating the conversion price is an important point of negotiation in J-KISS investment.

Although it is assumed that fundraising will occur in Series A as a scenario after fundraising by J-KISS, it does not necessarily proceed as expected. Therefore, J-KISS also assumes the following scenarios.

1. When the startup is acquired before reaching Series A
2. When neither Series A fundraising nor acquisition occurs within a certain conversion deadline (18 months after the allotment date of the warrant in the J-KISS template)

In case 1., it is stipulated in the issuance terms that the investor will be returned twice the investment amount. In case 2., it is stipulated that it will be converted into common stock.

Summary: Consult Legal professional in Negotiations in Investment Contract with J-KISS

Investments made through J-KISS (Japanese KISS) have more simple contracts compared to traditional investment contracts. This allows for a reduction in costs associated with contract negotiations and contract drafting that were previously necessary when receiving investments. However, negotiations are required for each case regarding the calculation method of the conversion price. The appropriate content for clauses requiring negotiation may vary depending on the business content of the startup receiving the investment, so it is recommended to consult with a legal professional in advance.