Understanding MISTO convertible instruments for Brazilian startup fundraising

For early-stage startups raising funds in Brazil, navigating the traditional mútuo conversível (convertible loan) can be complex and costly.  These agreements often involve intricate legal language, interest rates, and the risk of investors demanding repayment if the company faces financial distress, potentially leading to bankruptcy. This makes them less attractive for founders seeking straightforward funding options.

SAFEs (Simple Agreement for Future Equity) are an attractive fundraising option for U.S. startups looking for a simple convertible instrument, however  there is no SAFE equivalent under Brazilian Law. Taking the learnings from SAFEs for U.S. startups, Latitud, in collaboration with top law firms,  introduced Misto (Mútuo para Investimento Simplificado com Termos Otimizados)—an open-source convertible instrument template designed specifically for Brazilian startups. Misto streamlines the investment process by removing interest rates and providing clear, straightforward terms.

What is a MISTO?

A Mútuo para Investimento Simplificado com Termos Otimizados (MISTO) is a legal contract between a startup and its investor that allows the investor to purchase equity in the company at a future date, typically during the company’s next priced round or a liquidity event. From Portuguese, it roughly translates to mean a “Mutual Simplified Investment with Optimized Terms.” 

The MISTO is inspired by Y Combinator’s SAFE in the U.S., a founder-friendly, open-source template that simplifies the fundraising process and helps startups and investors avoid cumbersome legal paperwork and fees.

MISTO benefits

The MISTO is not a debt instrument.  Because a MISTO does not carry interest or have a maturity date, it  is an attractive option for early-stage Brazilian startups that want to avoid debt or immediate shareholder obligations. Until the MISTO converts, your investors have no voting rights or ownership in the company. They are instead incentivized by the opportunity to receive shares at a favorable price later. Once a triggering event occurs, a MISTO converts to equity based on the agreed terms, allowing investors to receive shares at a lower cost than future investors.

Additional benefits include:

• Minimal legal costs: Unlike traditional investment instruments that often require extensive and expensive legal review, the MISTO eliminates or drastically reduces legal fees by offering a pre-approved template created in collaboration with top Brazilian law firms. These cost savings are particularly impactful for early-stage startups, where every real saved on legal fees can be redirected toward growth initiatives.

• No interest rates: While traditional convertible loans accrue interest over time, the MISTO is free of interest rates. This interest-free structure makes cap table management significantly more predictable than when compared to a traditional convertible loan, allowing founders to more accurately forecast ownership. The absence of interest rates also means that valuation discussions during future rounds remain focused on the company's actual growth and performance rather than being complicated by accrued interest calculations. 

• Founder-friendly terms: The MISTO makes it easier for founders to raise capital without getting caught up in the complex legal documents and intricate negotiations typically involved in fundraising. Its terms are both founder-friendly and fair to investors, as opposed to convertible loans which often include control clauses that favor investors, such as veto rights and mandatory board seats.

• Delayed dilution: The MISTO also delays dilution until founders are further along in their startup's journey by converting into equity during a future priced funding round instead of requiring equity to be issued immediately. It provides clear and transparent terms regarding conversion, valuation caps, and discounts, allowing founders to retain more control over their company when compared to convertible loans or raising a priced funding round.

Post-money and conversion discounts

The MISTO is available in post-money or discounted versions. A post-money MISTO locks in an investor's ownership percentage upfront, providing more clarity for both the company and investors. 

A conversion discount version gives investors a discount on the price-per-share when their MISTO converts into equity. For example, if Series A investors pay R$5 per share during a priced financing round, a MISTO holder with a conversion discount will get to purchase their shares at a rate below R$5 per share. 

MISTOs vs SAFEs

The SAFE was created by Y Combinator in 2013 as an alternative to convertible notes. Unlike debt instruments, SAFEs do not accrue interest or have a maturity date, making them a simpler option that is both founder-friendly and fair to investors, with fewer legal complexities and lower costs. 

Because of Brazil’s complex legal, regulatory, and tax structures, many Brazilian startups are unable to capitalize on the same benefits U.S. founders can gain from a SAFE. In 2023, Latin American venture firm Latitud Ventures adapted the SAFE model to create the MISTO.

The MISTO was built specifically for Brazil's unique legal and regulatory landscape, incorporating mandatory conversion deadlines and tax-optimized structures that align with local corporate law. This makes the MISTO particularly attractive for deals involving Brazilian investors and companies.

Getting started with the MISTO template

The MISTO template is open-source and available in both English and Portuguese. Post-money and conversion discount versions are available. Latitud’s user guide walks founders, investors, and lawyers through the process so you can  easily fill out the template.

MISTO and cap table management

A common mistake many early-stage entrepreneurs make is neglecting to properly record their outstanding investment instruments. While the MISTO makes cap table management significantly more predictable, maintaining an up-to-date and accurate cap table is essential for tracking investor ownership, especially as the MISTO converts into equity at the next funding round. Each MISTO might have a different valuation cap or conversion discount, and failing to keep track of these details can lead to unintentional dilution. 

For Brazilian founders who want to stay on top of their MISTO investments and ensure accurate equity tracking, Carta offers robust cap table management software. This solution allows you to easily track your investments, quickly calculate ownership stakes, make projections, and maintain transparency with investors.

MISTO resources 

We’ve compiled the resources you need to get started with the MISTO.

Download the MISTO template here.

Read the MISTO user guide here.