Although SAFE agreements are not debts in the traditional sense and can be argued in favour of registering them as equity; In practice, we see SAFE agreements as long-term debt. When it comes to registering SAFE agreements, there is no fixed rule. For GAAP financial statements, we have seen SAFE recognized as debt and equity. Determining the ideal registration method for your SAFE agreement may depend on the terms of the agreement and an auditor`s judgment. Since there is no interest to be taken into account, it is not necessary to account for accrued interest. For accounting purposes, the company`s general ledger should always match the capitalization table (capitalization table), which is usually kept in an external spreadsheet or software such as Carta or Captable.io. In our experience, this area of financial statements can be extremely complex and it is important to keep detailed records. 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 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.

CSA 815-40-25-39 states: “For the purposes of the assessment, pursuant to subsection 815-15-25-1, of whether an embedded derivative indexed to an entity`s own shares would be classified as equity if it were self-contained, the requirements of paragraphs 815-40-25-7 to 25-35 and 815-40-55-2 to 55-6 do not apply if the hybrid contract is a conventional convertible debt instrument where the holder increases the value of the conversion option only by exercising the option and obtaining the total proceeds in a fixed number of shares or the equivalent amount in cash (at the discretion of the issuer). 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. ASC 815–10–25–17 results from the fact that “. The terms of the convertible preferred shares (with the exception of the conversion option) must be analyzed to determine whether the preferred share (and thus the potential hosting agreement) is more like an equity instrument or a debt instrument. A typical fixed income cumulative preferred share that has a mandatory redemption characteristic is more like a debenture, while a participating cumulative perpetual preferred share is more like an equity instrument. “Companies looking to take advantage of complex financing agreements need to have a good understanding of the nuances of the agreement, including accounting treatment. Contact your PwC advisor for more information. 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. 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. 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. The Simple Agreement for Future Equity (SAFE) has been in place for several years. Although it has its detractors, it is one of the most common forms of funding for high-risk and early-stage start-ups. As an alternative to equities versus convertible debt, SAFERs are typically accounted for as equity on a startup`s balance sheet. (After all, not holding debt off-balance sheet is one of the features that security advocates cite as an advantage over traditional convertible debt.) Without going into too much detail, the argument in favor of accounting for SAFE as equity (and not as any type of debt) is based on common sense, in the form of an examination of how something similar to SAFE is traditionally viewed. In this case, the SAFE analogy is a naked arrest warrant; an option to purchase shares of the issuer at a fixed price at a later date. If you imagine that the exercise price of the warrant is significantly higher than the current share price, you can see that the warrant is functionally similar to the SAFE: it is an instrument that may or may not turn into shares at a later date and has no other claim on the assets of the issuing company (or any other company). 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 both: 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. 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. Unfortunately, recent changes to the SEC`s offering requirements — ironically, changes designed to make it easier for startups and other less mature companies to raise capital from less demanding investors — include provisions that companies that use these rules will now be SEC reporting companies and are therefore required to report their financial statements to their Investors. Financial statements that meet the SEC`s expectations regarding the accounting treatment of various securities, including SAFE. If a SAFE does not constitute liability for any of the above reasons, it may not meet the stock classification requirements. This could be the case if SAFE has rights that are ranked higher than the shareholders of the underlying share, or if there is no explicit limit on the number of shares that can be issued at the time of settlement. There are two solutions to this puzzle. First, the SEC could come to its senses and recognize that, contrary to its initial view, SAFERs should be accounted for as equity. Hmmmm. I am not optimistic. Second, the FASB could jump into the breach and declare that SAFERs should be accounted for as equity. I am a little more optimistic about that. But be careful..

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Posted Tuesday, September 21st, 2021 at 3:55 pm
Filed Under Category: Uncategorized
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