Fiddich Review Centre
Alternative Investment

An investor’s guide to the galaxy of investment mechanisms

Conventional methods for investment such as stock investing are no longer sufficient on their own to quench the appetite of investors in developing financial markets. Financial markets develop as a result of emergence of new investment tools, expansions of conventional investment tools and emergence of diverse financial tools. investors, in light of the rapid changes in the economy seek new ways for investing.

Investors striving to maximize their profit at a risk level determined by themselves may tire of traditional investment methods such as acquiring stock and government bonds for a number of reasons. We will briefly tackle some investment methods encountered in practice below. These alternative investment methods enable (i) the investor to acquire discounted shares, to obtain quicker results from a transaction, the evaluate the company value in a dynamic manner, and (ii) the entrepreneurs to gain access to cash flow and financial support. 

Convertible Note: Convertible Note, is an investment tool that draws its inspiration from a procedure developed in the United States. It has transcended borders and found its way into practice under Turkish Law in accordance with the principle of freedom of contract. Entrepreneurs may acquire the financing they need through equity or debt. Entrepreneurs can easily and effectively provide finance with the Convertible Note approach using short-term, low-interest borrowing. With this contract, the investor lends to the company and can buy company shares when certain conditions are met in return for the loan. According to practice under Turkish Law, an investor is required to have a share in the company in order to be able to lend to the company. In order to overcome this hurdle, one share is symbolically granted to the investor to qualify it as a shareholder of the company prior to lending the loan. Thus, the shareholders of the company can acquire company shares by lending cash to the company and using this cash loan in a capital increase process.

SAFE: Simple Agreement for Future Equity, or SAFE, is a contract that originated in the US. It can be translated into Turkish as “Gelecekteki Öz Sermaye için Yalın Sözleşme”. The SAFE method is essentially the supply of funds now for the shares that will be acquired in the future. While SAFE includes the basic terms of the convertible note, it does not include the maturity and interest rate elements of the convertible note to facilitate the legal process and minimize the negotiation process. Under the SAFE mechanism, investor gives the company funds in exchange for future shares at a discounted or at the current valuation cap at the time of the triggering event. The SAFE method, which offers the investor a share purchase option in exchange for its investment and has no maturity date, facilitates the investment process by reducing potential legal and financial costs associated with issuing traditional shares or debt securities, such as interest and tax liabilities. The SAFE investor receives his/her shares based on the agreement, when an investment round or other triggering event occurs with a predetermined valuation.

KISS: Keep it Simple Securities are largely similiar to SAFE. This contract may appear in two types, the debt version and the equity version. Unlike SAFE, the debt version of KISS includes a maturity date and an interest rate. With KISS, investors can fund to the company and get discounted share in return for their initial investment with any interest that has accrued. KISS allows investors to fund the company and receive discounted shares of the company in exchange for the basic investment amount and the interest accrued on this amount.

The key difference between SAFE and KISS is that KISS has a monthly interest rate and maturity date. KISS also has an investor class called “major investor”. A major investor means someone who invests at least $50,000 in a venture capital company. SAFE, on the other hand, contains no such classification of investors according to the amount invested. KISS provides information rights to major investors. Being able to access information that is not disclosed to other investors can indeed be very valuable to the investors.

One of the conditions of KISS is that all investors using such financial instruments must be offered the same valuation cap. A convertible note, on the other hand, does not impose any restrictions on venture capital companies in investing in different valuations. 

Although Turkish market is used to dealing with traditional share transfers, being familiar with the alternative investment instruments, which are commonly seen in foreign markets, is important especially for venture capital companies in order to satisfy their investment needs swiftly and effectively.

It is evident that the systems mentioned above which largely develop through practice require recognition and legislative regulation in order to enable the financial markets to develop and present more options for investment.

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