This requirement is clearly met. SAFE agreements are not required for companies to provide guarantees to protect the position of security holders. In fact, SAFE owners do not have a position to be protected. They are in real danger of losing all their investments. The position of safeholders is very similar to that of ordinary shareholders, but the position of security holders is even more vulnerable than that of the Stockholders Commons, since the co-founders, who are also Common Stockholders, exercise full control of the start-up companies. SAFE owners do not have seats on the board of directors. SAFE carriers do not have a voice. Safe holders have no control or protection against the absolute control of co-founders. This requirement is clearly met. The «underlying share of the contract» is a preferred share that has not yet been approved or issued and therefore does not even exist. But the actual rights of SAFE holders are less than the rights of common shareholders. In fact, safe owners have no rights. Although the standard security agreement grants certain rights to FAS holders, SAFE holders are not in a position to assert their rights.
SAFE holders cannot vote. SAFE holders are not represented on the boards of directors of companies. The sale of their investment is entirely under the absolute control of the co-founders, who are also majority shareholders, of a start-up. To qualify for the capital classification, » (there is no need for cash payment required if the company does not file the file on time). There are no cash payments required for the counterparty if the company does not submit timely notifications to the Securities and Exchanges Commission (SEC). ASC 815-10-25-17 explains that «… The terms of the Preferred Stock Conversion option (other than the conversion option) are analyzed to determine whether the preferred stock (and therefore the potential loan contract) is closer to a capital instrument or a debt instrument. A typical preferential cumulative prime share, with a mandatory withdrawal function, is closer to debt, while the cumulative participation in a permanent preferred share is closer to an equity instrument. For example, if the valuation ceiling were $1 million and SAFE investors invested $200,000, the post-money valuation after the SAFE conversion would be $1.2 million. As such, with simple mathematics, this safe would effectively buy 16.67% of the company ($200,000.00 divided by $1.2 million).
Note that these conversion percentages are generally a better assumption and do not take into account other variables that come into play (option pool increases, previous investments with other mechanisms, following FAS, etc.). There are two solutions to this problem. First, the SEC could go back to reason and recognize that FAS should be accounted for in equity, contrary to what it originally had. Hmmmm. I`m not optimistic. Second, the FASB could jump into the breach and explain that FASAs should be accounted for in equity. I`m a little more optimistic. But, slowly.
While these updates give the investor more clarity, it`s still not perfect. These percentages are calculated immediately before equity financing. These investors can still be watered down by the equity financing cycle that triggers their conversion, but not by any subsequent SAFE investment, as was the case in the previous version of SAFE. And if your start-up client asks you, «how can I crack down on FAS,» what does the self-visiting professional consultant say? I don`t know? Depends on who you`re asking? Probably equity, but until the AFSB says something like that, maybe debt? It reminds me a bit of the old saw where different candidates for an accounting position are asked what a column of numbers summarize.