This requirement is clearly met. SAFE agreements do not require companies to deposit collateral to protect the position of SAFE holders. In fact, SAFE holders have no position to protect. They really run the risk of losing their entire investment in cash. The position of SAFE holders is very similar to that of common shareholders, but the position of SAFE holders is even more vulnerable than that of common shareholders, since co-founders, who are also ordinary shareholders of start-up companies, exercise full control over the companies. SAFE holders do not have seats on the Board of Directors. SAFE holders have no votes. The owners of SAFE have no control and no protection against the absolute control of the co-founders. The FASB`s definition of «monetary value» is as follows: «What would be the fair value of the cash, shares or other instruments that a financial instrument requires the issuer to transmit to the bearer on the settlement date under certain market conditions.» No such monetary value can be determined on the settlement date (conversion) until a date to be determined in the future.
ASC 815-40-25-10 contains all additional requirements for the classification of equity: «Given that any contractual provision that may require net cash compensation excludes the recognition of a contract as the entity`s equity (except in circumstances where the holders of the underlying shares would receive liquidity as set out in the preceding two paragraphs and paragraphs 815-40-55-2 to 55-6), all of the following conditions must be met, so that a contract can be classified as equity: Once the terms are agreed and the SAFE has been signed by both parties, the investor sends the agreed funds to the company. The Company will apply the funds in accordance with the applicable conditions. The investor does not receive equity (SAFE Preferred Share) until an event listed in the SAFE Agreement triggers the conversion. SAFE holders cannot choose. SAFE holders are not represented on company boards. The sale of their stake is entirely carried out under the absolute control of the co-founders, who are also majority shareholders of a start-up. To be eligible for the capital classification,» (no cash payment is required if the company does not submit the file on time). No cash payment is required for counterparty if the Company does not provide timely notice to the Securities and Exchanges Commission (SEC). ASC 815-10-25-17 states that «. The terms of the preferred share conversion option (with the exception of the conversion option) are analysed to determine whether the preferred share (and thus the potential loan agreement) is closer to a capital instrument or a debt instrument.
A typical cumulative preferred share with a squeeze-out function is closer to debt, while the cumulative interest in a permanent preferred share is closer to an equity instrument. For example, if the valuation cap was $1 million and SAFE investors invested $200,000, the valuation after safe conversion would be $1.2 million. With simple calculations, this safe would actually buy 16.67% of the business ($200,000.00 divided by $1.2 million). A SAFE investor only brings money to a start-up in exchange for a very uncertain and conditional potential outcome of their cash investment, which will be converted into preferred shares in the future if the start-up company is successful enough to attract future preferred stock investors and the company`s co-founders choose to conduct a preferred share financing round. (It`s only their choice.) However, there is a very real possibility that SAFERs will never be converted into preferred shares, and therefore SAFE holders may completely lose their investment and never receive anything in return. ASC 718–10–25–8 states in part: «. a call option written on a device that is not classified as a liability. must also be classified as equity. The legal substance of SAFEIs is that the investor deposits money into the start-up in exchange for the uncertain hope of preserving future stocks – shares that do not yet exist. The SAFE investor now receives absolutely nothing in exchange for his contributed capital — no seat on the board of directors, no voting rights — nothing but the uncertain possibility of future justice. The SAFE investor is exposed to a significant risk of never receiving anything for his investment and completely losing his investment without doing so.
Therefore, the debt classification is not appropriate for SAFERs. SAFERs should be classified as additional paid-up capital within permanent own funds. For SAFERs, there is no other appropriate classification in the balance sheet. With SAFERs, early investors invest in a start-up in exchange for the expected potential of future stocks, namely preferred shares (which don`t even exist yet) at an indefinite time in the future when the first round of preferred share prices takes place. This is not a transaction of a creditor, but of an early investor in shares. SAFE holders have no mechanism to force a start-up to issue preferred shares, and so there is nothing that could ever force a start-up to convert SAFERs into shares. The decision whether or not to conduct preferred share financing and whether or not to convert SAFERs into shares is entirely under the control of the co-founders of a start-up. Therefore, the future issuance of shares by such a company, if this happens, on the part of the company is entirely voluntary. If a start-up decides to issue preferred shares, it can approve enough shares at will. Thus, the net settlement of the shares is under the control of such a start-up.
In practice, this requirement is met. And in Silicon Valley, it`s also easy to count SAFE – SAFES are equity contributions from early investors in seed-stage startups. SAFERs are not debts. The mere idea that someone is even debating that they may be in debt is strange and stupid to financial professionals working in Silicon Valley. SAFERs were created with the express purpose of avoiding debt badges! (Of course, some so-called «SAFE» contain a mandatory repayment obligation after a certain period of time. Of course, these «SAFE» are just SAFE in name. Essentially, instruments with such clauses are nothing more than bonds convertible under a different name.) SAFEIs are financing instruments in which angel or seed investors give money to start-ups in exchange for the possibility of their investment being converted into future shares – but only when certain future events occur. As a form of financing, funds from these agreements should be classified as follows: (i) debt; (ii) equity; or (iii) something in between – what`s called «mezzanine» or temporary equity. This condition is clearly met. Unregistered preferred shares are generally issued to SAFE investors upon conversion.
Registration of preferred shares with the SEC is not required or even contemplated under the STANDARD SAFE agreement. This requirement is clearly met. SAFE arrangements are not required for companies to provide guarantees to protect the position of security holders. In fact, SAFE owners have no position to protect. They really risk losing all their investments. The position of custodians is very similar to that of common shareholders, but the position of security holders is even more vulnerable than that of shareholders under Commons, as co-founders, who are also ordinary shareholders, exercise full control over start-up companies. SAFE owners do not have seats on the board of directors. SAFE holders have no voice. Vault holders have no control or protection against the absolute control of the co-founders.
This requirement is clearly met. The «underlying part of the contract» is a preferred share that has not yet been approved or issued and therefore does not even exist. But the real rights of SAFE holders are inferior to the rights of ordinary shareholders. In fact, safe owners have no rights. Although the standard security agreement grants certain rights to FAS holders, SAFE holders are not able to enforce their rights. The SAFE is useful as a simple and relatively balanced document to enable early-stage companies to quickly and easily raise funds from friends, family members and angel investors without the complications associated with price rounds. B such as determining the value for the company, or with debt instruments, such as the various accounting and tax consequences, which are associated with the taking of debts. SafIts are very similar in their conversion characteristics to convertible bonds. However, SAFERs do not include important debt characteristics such as accrued interest, fixed maturities or repayment obligations. SAFERs are similar in some ways to call options – the investor has the option to buy shares in the future. However, unlike call options, there is no future strike price – the full price has already been paid. SAFERs are designed and intended to be converted into preferred shares, so in this sense they are somewhat similar to preferred shares.
But SAFE`s are not preferred shares – at least not yet – and SAFE holders do not own preferred shares (or common shares) until SAFEIs are converted. Then we come to paragraph 815-40-15-7D, which says, «. If the exercise price of the instrument or the number of shares used to calculate the settlement are not fixed, the instrument (or embedded feature) will continue to be considered to be linked to a company`s own share if the only variables that could affect the settlement amount would be the fair value entries of a fixed date or option on the shares. «While these updates give the investor more clarity, it`s still not perfect.