Contractual mechanisms to dynamize foreign investment in Colombia

As a result of the COVID-19 pandemic, Colombia faces a significant challenge to jumpstart its economic growth through foreign investment [1] . During 2021, Colombian authorities have been creating incentives to stimulate investment and alleviate COVID-19's effects in the Colombian economy.

In this line, the government and ProColombia are hosting an Investment Summit from October 1st to the 20th with the purpose of connecting foreign investors and entrepreneurs [2]   to discuss business opportunities, partnerships and to provide a networking environment. It also aims to facilitate meetings between investors and governmental authorities and institutions to help the former enter the Colombian market [3] .

Colombian regulatory efforts to promote digital transformation and investment in technology, software development and artificial intelligence, will have an essential role in the 2021 Investment Summit, bearing in mind the close relationship between these business models and the innovation needed in different sectors of the national economy.

However, this growth will only be obtained if entrepreneurs and investors can benefit from easy and quick investment mechanisms that, on the one hand protect investors and on the other, enable entrepreneurs to raise seed capital and start their businesses quickly. The simplest investment tools for these purposes are: (i) the Keep it Simple Security (“KISS”) and (ii) the Simple Agreement for Future Equity (“SAFE”).

A SAFE is an agreement that provides rights to the investor for future equity in a company similar to a convertible note, except without determining a specific price per share at the time of the initial investment. The SAFE investor receives the future shares when a priced round of investment or liquidity event occurs. SAFEs are attractive for early-stage startups because they are short documents requiring negotiating the basic terms of the investment and allowing investors to convert their shares (i) with a valuation cap and no discounts, or (ii) with discounts with no valuation caps, among others.  This simplicity enables startups to seek initial funding without the need to enter into long and cumbersome negotiations with investors.

On the other hand, the KISS allows investors to invest money in the company and in return convert the underlying investment amount, plus accrued interest, into shares of the company at a discount. A KISS provides better protections for the investor because it provides for the payment of interests, a maturity date, the right to information, and a participation right in future investment rounds. On the other hand, a SAFE offers a much more flexible structure.

Bearing in mind the foregoing, the chart below provides a comparison of these investment instruments and their most relevant characteristics: