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. Just like convertible bonds, SAFE arrangements can have valuation caps and discounts. Most SAFE agreements are converted into preferred shares. Preferred shareholders have certain preferences for dividends over common shareholders as well as conversion rights. We then turn to paragraph 815-40-15-7E, which says, “. Fair value inputs to a fixed futures contract or stock option can include the company`s share price and additional variables, including all of the following variables: The simple agreement for future shares (SAFE) has been around 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.) Others argue that SAFERs should be registered as debt. AsC 480 provides an example: “480-10-55-22 Some financial instruments involve bonds that require (or allow, at the discretion of the issuer) bonds that require (or permit) settlement by issuing a variable number of shares of the issuer whose value is equal to a fixed amount of money. For example, a corporation may receive $100,000 in exchange for a promise to issue a sufficient number of its own shares worth $110,000 at a later date. The number of shares that must be issued to meet this unconditional obligation is variable, as this number is determined by the fair value of the issuer`s shares on the day of settlement. Regardless of the fair value of the shares at the time of settlement, the holder will receive a fixed monetary value of $110,000. Using the example, this would be recorded as a responsibility. IN ADDITION, ASC 480-10-25-14 states: “A financial instrument that embodies an unconditional bond, or a financial instrument that is not an outstanding share and that contains a conditional bond that the issuer must or may settle by issuing a variable number of its equity shares, is classified as a liability (or, in certain circumstances, as an asset) if, at the time of its launch, the monetary value of the bond is based exclusively or primarily on one of the following conditions: 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. Notably, in an otherwise highly technocratic and rules-based area of accounting (which determines whether derivatives should be accounted for as debt or equity), the CSA requires judgment in this case. It asks us to “analyze” whether an instrument is “more similar to an equity instrument” or “more similar to a debt instrument.” This kind of language in the CSA is refreshing and reinforces our argument that SAFERs should be accounted for as equity rather than debt.
The essence of SAFE Is that it looks much more like stocks than debts. The risk-return characteristics of SAFE Are equity, not debt. The SEC`s response to safes is a fiasco caused by its attempt to apply existing accounting rules to a new financing innovation for which there are not yet proper accounting rules. They try to force a proverbial round ankle into a square hole, and it`s a mess. At first glance, this CSA paragraph appears to indicate accountability for SAFERs and therefore appears to be inherently contradictory and inconsistent with paragraphs 480-10-25-4 and 480-10-25-7. However, on closer inspection, it becomes clear that SAFERs are very different from the type of transaction considered in ASC 480-10-25-14. In Section 2, SEC staff say in part: “ASR 268 requires that preferred securities redeemable for cash or other assets be classified outside of continuing equity if they (1) at a fixed or determinable price on a fixed or determinable date, (2) at the option of the holder, or (3) after the occurrence of an event that is not solely under the control of the issuer, can be taken over. “But even if a SAFE is not a liability because of the above criteria, a SAFE can only be classified as equity if it is at the same time: this brings us to ASC 815-40.
Without going into extreme detail, this guide tells us that SAFE is due to a few factors. The first is that SAFE is not indexed to the Company`s own shares under ASC 815-40-15-5 to 15-8a, see ASC 815-40-55-33 for example. Thus, a classification of equity is excluded. If, for any reason, the SAFE were considered to be attached to the company`s own shares, there would be other considerations that would still result in the SAFE being classified as debt, which can be found in ASC 815-40-25-7 to 25-35. Some of the ones that may be true are: Technically, before converting SAFEEs, start-ups don`t have enough shares allowed to issue when converting SAFE.. .