What Is J-KISS? How It Works, Capital Policy, and What Founders Should Check
Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.
Where this article describes specific terms of the template, it uses J-KISS 2.01 as published by Coral Capital as the baseline. Earlier versions and individually modified contracts should be checked against the actual document.
I regularly advise on J-KISS financings from the seed stage through pre-Series A. Sometimes I revise the template on the issuer's side; sometimes I review the terms on the investor's side. I also receive requests from existing shareholders to review a J-KISS being issued to other investors. A defining feature of J-KISS is that the same contract looks different depending on where you stand.
J-KISS is a contract template for seed investment published by Coral Capital. It is widely known as a mechanism for raising money quickly using convertible equity. However, proceeding on the assumption that it is simply a "lightweight contract" carries risk. Because neither common shares nor preferred shares are delivered at the time of issuance, the change in ownership percentages is not visible. When milestones arrive, such as a Series A, an exit, or the conversion deadline, the terms agreed at issuance suddenly surface as real numbers.
In practice, the basic task is to make it possible, before issuance, to see how this round connects to the next Series A and to a possible future M&A transaction.
If you want a list of items to check immediately before actually raising money with J-KISS, please also see Checklist Before Raising Funds with J-KISS: The Capital Policy Founders Should Confirm.
What to Check When You Receive the Contract
When I receive a J-KISS contract, these are the five items I check at the start of the review:
- Whether the sentence at the beginning of the contract stating that it "has not been modified from the published template" remains or has been deleted
- Whether the valuation cap and the discount operate in the basic form, where the "lower" of the two applies, or whether the structure has been rearranged
- Whether you understand the figure obtained by dividing the investment amount by the post-money cap (a rough indication of the floor of the investor's ownership before new shares are issued in the next equity financing)
- If there are multiple investors, who qualifies as a "Major Investor" and who makes up the "Majority Investors"
- Whether you can explain how this J-KISS will be treated in each of a Series A, an M&A transaction, and the arrival of the conversion deadline
The advantage of J-KISS lies in the speed and transparency that come from using the published template as is. Unless you first confirm whether the contract in front of you is the unmodified template or has been altered somewhere, that premise breaks down. In real transactions, it is not unusual for the parties to have modified the template.
There is a practical clue for spotting changes. The J-KISS template places, at its beginning, a sentence to the effect that "this Agreement has not been modified from the published template, except for blanks and bracketed text." In actual deals, this sentence itself is sometimes deleted when the template is modified. This is done to avoid an inconsistency with the individual modifications, and the deletion of the sentence is a strong clue that individual modifications exist. That said, other provisions may have been modified even if the sentence remains, so in either case I compare the document with the corresponding version of the published template and confirm the differences.
A typical example of what had been altered in past deals is the structure of the conversion price itself. The basic form of the template selects the lower of the price after applying the discount and the price based on the cap. In actual deals, however, I have also seen rearrangements in which conversion upon a qualified financing uses only the discount, and the cap is retained only as a reference price upon the conversion deadline or an M&A transaction. Conversely, there are irregular forms for angel investors in which the discount is set at 0% and the cap is set so high that it hardly functions. Even under the same name "J-KISS," the economic terms can operate very differently.
The amount threshold for Major Investors is also frequently changed. The template grants information rights and preemptive rights only to investors who have paid in at least a certain amount. Moving this threshold changes which investors receive which rights. In a round in which several individual investors participate with small amounts, this design directly affects the burden of managing investors later.
If changes are found, I summarize which provisions have changed, in whose favor, and to what extent, in a form that makes the impact on the capital policy clear. With this organized in advance, you can respond smoothly when asked to explain the terms of past financings during Series A due diligence.
The Legal Nature of J-KISS and How Conversion Works
J-KISS is a financing method in which, rather than issuing common or preferred shares on the spot, the company issues share acquisition rights for consideration, which convert into shares upon a future financing round. Legally, it is a transaction issuing share acquisition rights. The word "conversion" is used for convenience, but the actual processing is determined by the exercise conditions, call provisions, and the class and number of shares to be delivered as set out in the terms and conditions of the share acquisition rights. The legal reality of what is called conversion is confirmed by cross-checking the contract against the terms and conditions.
In an equity financing, the paid-in amount, the number of shares, and the ownership percentages are fixed at the time of issuance. With J-KISS, on the other hand, which class of shares and how many will be delivered in the future are not fixed. Instead, the parties agree in advance on the rules to be used in the future calculation. Typical examples are the cap and discount, the qualified financing threshold and the conversion deadline, the treatment upon exit, and various investor rights. It is important for founders to view these as terms that reserve the future shareholder composition.
The economic terms founders should look at first are the cap, the discount, and the conversion events.
The valuation cap functions as the upper limit of the company valuation used when converting into shares in the future. Because J-KISS 2.0 adopts a post-money valuation cap, the ratio of the investment amount to the cap gives a rough indication of the ownership the investor may acquire in the future. For example, raising JPY 30 million with a post-money cap of JPY 300 million can be read as a term that gives that investor roughly 10 percent of ownership.
However, dividing the investment amount by the cap only indicates a rough floor of ownership in the conversion calculation. Dilution from the issuance of new shares in the Series A, and from the accompanying expansion of the option pool, occurs separately. If multiple J-KISS instruments have been issued, you should also individually confirm the scope included in the "same-type share acquisition rights" and the calculation terms for each issuance. Only by modeling the cap table before and after the Series A, rather than just looking at the cap figure, can you see the full picture of the impact.
The discount is a term under which the investor receives shares at a price discounted by a certain percentage from the share price paid by new investors in a future round. The Ministry of Economy, Trade and Industry's guidelines on convertible investment instruments give 20 percent (a factor of 0.8) as an example of the default in J-KISS, but this is not a fixed amount mandated by law; the actual percentage is a matter of negotiation.
The point to keep in mind is not to look at the cap and the discount in isolation. Under the same assumptions, you calculate the price obtained by applying the discount to the Series A issue price per share and the price obtained by dividing the post-money cap by the prescribed fully diluted share count, and adopt the lower one. The cap is a mechanism that gives the investor a lower share price by capping the company valuation; it does not guarantee a minimum share price. Which of the two applies changes depending on the valuation assumptions, so you should model and compare multiple scenarios.
The qualified financing that triggers conversion is generally designed so that conversion into Series A preferred shares or the like occurs when an equity financing above a certain size takes place. Coral Capital's published materials give equity financing of JPY 100 million or more as a guide. However, under the 2.01 terms and conditions, the test is made using the amount raised excluding the total issue amount of shares issued upon conversion. It is important to check the defined terms in the contract and the terms and conditions, not just the summary in the published materials.
Connection to the Investment Agreement and Key Provisions
J-KISS is a separate contract from the investment agreement and shareholders' agreement executed in the Series A, but in practice they are closely linked. If the template is used as is, upon a qualified financing the investor acquires shares in accordance with the terms and conditions through exercise or through the company's call procedure. Where the issue price per share of the preferred shares issued in the next round differs from the J-KISS conversion price, the template is designed to deliver a separate series of preferred shares with adjusted terms, such as the liquidation preference amount and the acquisition price used in calculating conversion into common shares. Section 5.9 provides that if specified investment-related agreements are executed in the next financing, the J-KISS investor will also execute those agreements upon exercise or conversion. This does not mean that contractual rights automatically become identical, so you should confirm which documents the investor joins and which provisions apply.
The extent to which J-KISS investors join the Series A agreements as parties is a point that often becomes an issue in practice. Even where they hold the same class of shares as the Series A investors, how far information rights and preemptive rights are made common affects the contract design.
Among the provisions built into the template in advance, there are two mechanisms that deserve particular attention.
The first is the Major Investor threshold. Under the template, an investor whose paid-in amount, aggregated with that of its related parties, is JPY 5 million (the default) or more qualifies as a Major Investor. In addition to the obligation to provide financial information and preemptive rights, the company is obligated to grant the rights given to major investors in subsequent investment-related documents. This preemptive right is not a pro rata right; it is a right to participate in offerings on the same terms within the remaining allowance, with a cumulative cap of twice the paid-in amount under the agreement, less amounts in which the investor has previously participated. The issuance of stock options is excluded. Note that even if the investment amount is small, the contractual rights are not necessarily limited.
The second is the Majority Investors provision. The template provides a framework under which the terms of the same series of J-KISS can be amended or waived by written agreement between the company and investors holding a majority of the aggregate issue price. However, amendments to the excepted matters set out in Section 5.13, such as assignment of rights, expense bearing and indemnification, cooperation obligations, the amendment provision itself, and the rights under Section 5.2 (only where the relevant investor alone is a Major Investor), require the individual written consent of the investor concerned. Procedures under the Companies Act are also carried out separately. While there is a path to amend terms with majority consent, important provisions are individually protected, so it is important to know at the time of issuance who makes up the majority.
You also need to anticipate in advance how the most-favored-nation provision will operate in practice. The template provides that if, after payment is completed and before conversion, the company issues covered subsequent share acquisition rights or the like, it must give written notice within five days of the execution date and attach a copy of the contract. Stock options are excluded, and not every issuance of common shares is subject to notice. Even so, the more investors there are, the heavier the burden of the notice procedures becomes.
Founders should confirm in advance the terms that will apply to each investor in the Series A. In deals with multiple J-KISS investors, the scope of each investor's participation is raised again during Series A negotiations, and the discipline sought by the lead investor may conflict with existing arrangements.
Careful judgment is also needed when executing a side letter at the J-KISS stage. The METI guidelines also point out issues that arise when information rights and most-favored-nation provisions are set by side letter. Even a short agreement can create a substantive binding effect close to that of a shareholders' agreement.
The advantage of J-KISS is that detailed negotiations can be deferred. However, issues that can be deferred must be clearly distinguished from issues that should be agreed at the time of issuance. Participation rights in the next round and treatment upon M&A, in particular, are areas where it is easy to find later that things differ from what you expected.
Treatment When Unconverted and Upon Exit
J-KISS sets out, at issuance, how the instrument is handled if an M&A transaction occurs before a Series A or if no qualified financing occurs within a certain period. This looks like a matter for the future, but in reality it is a scenario about which I receive many inquiries.
When a change of control transaction or the like takes place, the design is that the company acquires share acquisition rights not exercised by the day before the acquisition date set by the company, in exchange for cash equal to twice the issue price. The investor considers whether to exercise before the acquisition date in accordance with the terms and conditions, acquire shares at a price based on the cap, and participate in the transaction. The company gives written notice of the transaction terms at least two weeks before the acquisition date (or, if none is set, the transaction execution date). Change of control transactions include not only M&A transactions that meet prescribed conditions such as the transfer of voting rights, but also a disposition of all or substantially all assets, dissolution and liquidation, and an IPO. However, you should check the definitional exceptions, such as the establishment of a wholly owning parent company that substantially maintains the existing voting ratios, and issuances of shares made purely for financing purposes.
Regarding the arrival of the conversion deadline, the METI guidelines introduce a framework under which, after 18 months or more have passed, the instrument can be converted into common shares at the investor's request. Under the template's design, if no qualified financing occurs even after 18 months from the allotment date, the rights can be exercised with the approval of holders of a majority of the aggregate issue price of the defined same-type share acquisition rights. They are not automatically converted into shares or redeemed in cash as a matter of course. If the company cannot raise money by the deadline, it will discuss with the investors whether to agree on an extension or the like. The deadline functions less as a date for automatic processing and more as a milestone for starting discussions with investors in light of progress at that point.
If the conversion deadline is too short, the company may be forced into a hasty financing contrary to its business plan. Conversely, if the deadline is vague, investors cannot see what lies ahead. I think it is advisable to set the provision based on development progress, hiring plans, and the time needed until the next financing, while anticipating with whom and on what terms discussions will take place when the deadline arrives. The absence of a maturity or repayment obligation when unconverted, and the differences from loan-type instruments, are explained in The Difference Between Convertible Notes and J-KISS.
The Cap Table and Materials to Confirm Before Issuance
When raising money through J-KISS, prepare not only the current cap table but also models assuming each stage: immediately after issuance, immediately before the Series A, and after conversion is complete.
Multiple J-KISS issuances require particular attention. As financings pile up from seed to pre-Series A to bridge, the caps and discounts of each round layer on top of one another and come back as significant dilution in the Series A. The more rounds there are, the more complex the conversion calculation becomes.
The relationship with the stock option pool is also important. Depending on whether the Series A investors require the pool to be secured on a pre-money or post-money basis, the degree of dilution of the founders' ownership varies significantly. If the conversion of J-KISS overlaps with the creation or expansion of the pool, the ownership the founders retain may fall below expectations.
The same applies to the connection with preferred shares. For the class shares into which the instrument converts, confirm the rights set out in the articles of incorporation, such as distribution of residual assets. Contractual rights such as preemptive rights should be confirmed separately; do not conclude that the same contractual rights are automatically granted merely because the investor holds the same class of shares. J-KISS is a contract that ultimately connects to the design of class shares.
There are three materials you should have ready before issuance.
First, a conversion simulation. Set multiple assumed Series A valuations and model the shareholder composition both when the cap applies and when the discount applies. In the calculation, accurately reflect the assumptions under the definition of the fully diluted share count: exclude treasury shares and treasury share acquisition rights, include issued stock options and the existing unissued pool, and exclude the pool increase accompanying the next financing. If there is a J-KISS that converts at the discount, align the figures with the provision in the terms and conditions requiring recalculation with that converted share count built into the denominator. J-KISS instruments from multiple rounds are not necessarily treated as same-type share acquisition rights, so check the terms and conditions of each round.
Second, a list of changes. Even when the published template is the basis, organize the items by distinguishing between fill-in items and modified items. If you tabulate the caps and discounts that differ by investor, the list can be used as is in the Series A due diligence process.
Third, a policy on connecting to the next round. Briefly write down the terms of the preferred shares to be delivered in the Series A, the form of participation in the investment agreement, whether consent from existing shareholders needs to be obtained, the timing of the pool expansion, and so on. Even a policy memo of a few lines serves as a base that supports a smooth initial response toward the next financing.
Without these three, simply reviewing the contract documents will not reveal the substantive impact of J-KISS. When you are in a hurry to accept the terms offered, attention tends to go to the amount raised and the funding date, but since this is a contract that affects the future shareholder composition, there is a risk of misjudgment unless it is considered together with the cap table.
At LegalAgent, we do not limit J-KISS reviews to a formal check of the contract wording; we handle them as part of startup legal services that look ahead to the capital policy and the design of the next round.
The design of J-KISS terms themselves is also covered in detail in Checklist Before Raising Funds with J-KISS: The Capital Policy Founders Should Confirm. The procedures for actually converting in a Series A are covered in J-KISS Conversion (Exercise) Procedures: A Practical Guide to Avoid Scrambling in the Series A, and the issuance of preferred shares in a Series A is covered in Provisions in a Preferred Share Investment Agreement That Founders Should Review as Business Decisions.
Frequently asked questions
What is J-KISS?
It is a fundraising method for the seed stage that uses stock acquisition rights (convertible equity) intended to convert into shares upon a future financing round or similar trigger. In Japan, the template published by Coral Capital is widely referenced.
What are the advantages of J-KISS?
It allows a company to raise funds quickly with a relatively short contract, without squarely fixing the valuation at the time of issuance. On the other hand, because the valuation cap and discount fix the formula for future dilution at the time of issuance, capital policy simulations are still necessary.
When does J-KISS convert into shares?
In many cases, it converts into shares at a conversion price based on the cap or the discount when an equity financing above a certain size (a so-called Series A) takes place. The treatment where no qualified financing occurs by the conversion deadline depends on the terms of issue and discussions with investors.
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