Safe Simple Agreement For Future Equity Accounting
The legal substance of SAFEs is that the cash investor in start-ups in exchange for uncertain hopes of future equity – shares that do not yet exist. Now, the SAFE investor has absolutely nothing but his under-piloted capital – no board seat, no voting rights – just the uncertain possibility of future equity. The SAFE investor faces a significant risk of never getting anything for his investment and, on the contrary, of losing his investment completely without opposing himself. Therefore, the debt classification is inappropriate for FAS. FASD should be classified as additional paid-out capital within permanent capital. For FAS, there is no other appropriate classification in the balance sheet. In their conversion characteristics, FAS are very similar to convertible bonds. However, SAFes do not contain significant debt securities such as accrued interest, fixed maturities or repayment obligations. SAFS somehow look like call options – the investor has the chance to acquire shares in the future. But unlike call options, there is no future exercise price – the total price has already been paid. FAS is designed to be converted into preferred shares, so it looks pretty much like preferred shares. But FASCs are not preferred shares – at least not yet – and SAFEs holders do not have preferred shares (or common shares) until FASCs convert. Mandatory repayment refers to a specific amortization plan, which usually consists of accrued interest when the financial instrument has not been converted to equity before.
Mandatory repayment is the most common for preferred shares to be exchanged. SAFes are not mandatory. (Note that some investors in some companies must include mandatory withdrawal functions in their “SAFEs.” But in these cases, such an instrument is only a “SAFE” – in fact, it is debt.) THE ASC 815-40 analysis emphasizes that the FASB must publish guidelines relevant to the accounting and reporting of FASCs and that the guidelines should include that FASS be an additional released capital that is part of the standing capital. As with any share transaction, it is important that you consult with your legal and accounting representative when considering a simple agreement on future capital. If you have questions about how a SAFE can work for your business, or if you are interested in a more traditional transaction, contact us for a free 30-minute consultation. THE CSA 480-10-25-14 explains in part: “A financial instrument… that the issuer must or can pay a variable number of its shares by issuing a variable number of its shares, be considered a liability … whether, at the beginning, the monetary value of the commitment is exclusively or primarily at… a known amount of fixed money at the time of creation (for example. B a payment payable with a variable number of the issuer`s equity units). This is Section 1, point a).
It`s front and middle. This is the expected result in normal. Seed Stage and start-up investors intend to understand and intend to convert funds invested in SAFE instruments into shares in a future, expected and anticipated financing, in which newly created preferred shares will be issued. That is hope. That is the intention. But that`s never guaranteed. Seed-training investors in FAS are taking a big risk in the hope of significant returns. This is a high-beta proposal.
Many companies in the development phase need bridge financing. They are increasingly attracted to standardized instruments, such as Simple Agreements for the Future (SAFE) and Keep It Simple Securities (KISS).