Colombia’s Thriving Startup Ecosystem
Colombia is starting on a new path in its democracy, economics, and politics. On the one hand, the elected President for 2022-2026, Gustavo Petro, the first left-wing presidential candidate to succeed, will be introducing the new tax reform. On the other hand, the entrepreneurial ecosystem is growing as never before. Recently, the second unicorn (first Rappi, now Habi) was announced, setting a new economic trend for employment and wealthiness distribution.
On top of that, the fourth industrial revolution and the Covid-19 outbreak are setting a new context around the world. Globalization is a reality, more than ever. All companies are now capable of offering services at any location. Colombia’s startup Ecosystem is a regional leader in innovation, ranked 44th globally by the GEM and fourth for startups in Latin America.
Colombia’s startup ecosystem has an increased need to understand the legal framework to raise capital and the legal keystones underneath to cope with the global investment parameters.
Finance vs. equity within the legal framework for startups
The most common legal solutions for investing in Latin American startups, have been created by the United States lawyers. Even the local fundraising in those countries is driven through the US. Hence, latin lawyers have been learning and provide practical solutions adapted to the Latin America entrepreneurship market. The economic reality of Colombia is aligned with this reality.
We have identified the following instruments as common legal vehicles used by entrepreneurs and investors, in local or international investment rounds.
· Simple Agreement for Future Equity (SAFE): This legal product will i) convert into preferred stock when the startup issues such stock in a priced equity round; ii) typically contain a valuation cap that sets the highest valuation that can be used to determine the conversion price; and iii) convert into stock at a discount price compared to the price that will be paid by the new venture capitalist. Unlike the classical convertible note, the SAFE lacks a maturity date and does not accrue interest.
· Keep it Simple Security (KISS): The KISS is a convertible security where the capital converts into preferred stock at a given qualifying event. There are two types of this legal product. In the first hand, Debt KISS where the note has accrued interest and a maturity rate. And, in the second hand, Equity KISS, where the note does not have any interest, nor a maturity date (such as the SAFE), and the conversion occurs only if the equity round is above a given amount.
· Vesting: This type of legal product seeks services or milestones to be met, without having the obligation of paying in cash to a certain individual or individuals.
· Crowdfunding: Crowdfunding eliminates the back-and-forth between entrepreneurs and investors, as concentrates of offering an investment opportunity directly to the public.
Our suggestion will be to seek the best alternative for each startup based on the current situation of the venture. Usually, a combination between the different legal products strives for the best alternative for entrepreneurship.
Daniel Acosta Guevara
Cel. (+57) 300 731 3923
Co-author: Claudia Gabriela Romero
Co-founders of legalnova* (www.legalnova.co) a consultancy firm based in Miami, United States, and Bogotá, Colombia, that provides legal, accounting, and financial services to start-ups, investors, and multinational companies