Some SAFERs involve or are linked to a share repurchase obligation that requires the issuer to settle through a transfer of cash or other assets and, as such, are considered a liability of the issuer. Instruments that allow the investor to receive shares of the Company in exchange for cash or other assets, even if only for certain contingencies, and that are related to the Company`s share price, are generally also liabilities. In addition, SAFERs often include a conditional obligation related to a company`s shares that requires the issuing company to transfer cash or other assets to certain contingencies. These events may include a liquidity event or a capital increase, which may result in a possible classification of liabilities and recognition at market value. We frequently receive questions about the accounting for warrants, options, futures, conversion functions and other contracts relating to a company`s shares. Equity contracts are often long and complex, and the associated accounting guidelines contain many detailed rules and exceptions. The particular wording of a contract can have significant accounting implications. B for example if the contract is considered capital or an asset or a liability, and the effect on the associated income. As a result, SEC staff often ask registrants about their accounting for their own stock contracts and supporting accounting analysis. For the uninitiated, SAFE is an acronym for Simple Agreement to Future Equity. In 2013, Y Combinator, the seed capital start-up accelerator, introduced this note to help start-ups raise funds. The impetus was that convertible bonds gave no flexibility to the founders and could potentially hinder future investments.

Therefore, he introduced a reduced instrument that had certain characteristics of a convertible bond, and the SAFE note was born. For a more in-depth review, see the Y Combinator SAFE User Guide. Based on my experience, as well as the information in this guide, here`s a quick overview of safe notes, their benefits, and potential issues. • Discount: Predetermined discount on what converts the ticket into shares as soon as a triggering event occurs – usually the triggering of a new round. Simple Agreement for Future Equity (SAFE) has become an attractive way for companies, usually startups or early-stage companies, to raise funds profitably. But contrary to what its name suggests, charging prices has proven to be anything but easy. At present, the Financial Accounting Standards Board (FASB) has not issued specific guidelines for the accounting of SAFERs, which has led to some divergence in how SAFERs are accounted for at the time of issuance. Even though the FASB has not yet published a specific standard on this topic, it is enough to assume that SAFERs will continue to be an attractive form of financing as long as companies look for easy ways to finance their activities.

However, until a standards committee gets involved, it is up to the individual companies that offer SAFERs to evaluate the rewards on a case-by-case basis. While there may be clear benefits for financial statements in classifying SAFE premiums as equity as opposed to a liability, an entity must be careful to consider the details of the instruments it issues. The purpose of all these features is to make things as simple and clear as possible for both the startup and the investor. Many companies in the development phase need bridge financing. They are increasingly attracted to standardised instruments such as Simple Agreements for Future Equity (SAFE) and Keep It Simple Securities (KISS). However, the accounting, legal and operational details associated with these agreements are not always simple, regardless of their name. While instruments may qualify as ”inequality” or entitle you to a return similar to that of shares, they should not lead to a classification and measurement of equity for accounting purposes. A SAFE note is a much cheaper deal than a convertible bond. The main selling point is that there are free templates, with the argument that it`s so simple that you don`t have to involve a lawyer, at least for the first draft. As a rule, there are also no interest payments or an agreed end date.

In other words, the SAFE note does not have a fixed date (maturity date) like convertible bonds, where the holder of the note can convert the note into shares. There is also usually no obligation to reimburse the principle if the company breaks down or is not purchased. A SAFE note provides a capital inflow without the constraints of restrictive covenants, promises of redemption or initial issues of control or dilution of a direct share issue. • Valuation ceiling: a predetermined valuation at which the bond is converted into shares. This is important because it creates security for both the investor and the company. SAFE Bonds do not offer any of the protections offered by convertible shares. There is no liquidation preference, no guarantee that you will get your money back and no guaranteed time for converting shares. However, it may not be that bad considering the investment phase. SAFE ratings are best used in the early stages of a business, before Series A. However, even if a SAFE is not a liability due to the above criteria, a SAFE can only be classified as equity if it is at the same time: even if SAFERs are not a liability for any of the above reasons, they cannot meet the equity classification requirements – for example, due to rights exceeding those of the shareholders of the underlying share and/or the absence of an explicit limit on the number of Shares that may be issued at the time of settlement. .