Simple Agreement for Future Equity Gaap

The launch of safe by Y Combinator is a great example of what Silicon Valley is doing best – innovations to make business cleaner, easier, faster, better and more accessible to startup founders. Startup founders and their peers are extremely busy people, and their working hours are dedicated in a very valuable way to developing their technology, building their teams and serving their customers, not to administrative burdens such as renegotiating convertible bond contracts with upcoming maturity dates. SAFE is a simple but brilliant innovation that protects startup founders from unnecessary administrative costs and allows them to focus on growing their business. This means that the company will be required to carry the safe as a debt on the balance sheet (think of it as a bond rather than a debt) and regularly evaluate the SAFE to write the value up or down and record a result based on the fluctuation in value. How do you rate SAFE? Well, it`s a completely different blog and a completely different thing. The simple answer is a wild assumption by management based on the best information it has, or the need to hire an evaluation specialist (preferred, but more expensive method). If you actively sell the SAFE, the fair value is generally known, it will be the same value for which you sell it. If the time elapses between the SAFE offer and the reporting period, especially if additional bids have taken place, the SAFE probably has a different value and you should hire an evaluation specialist to help you. SAFE holders have no mechanism to force a preferred share funding round and the resulting conversion of their invested funds into preferred shares. SAFE owners have no way to force the start-ups they invest in to do anything. The decision whether or not to receive preferential equity financing and therefore the conversion of SAFE into shares is entirely under the control of the company`s co-founders. Therefore, the future issuance of shares by the Company, if this occurs, by start-ups is entirely voluntary. I had clients who wanted to classify SAFERs as long-term debt and others as equity.

Through lawsuits and procrastination, scrutiny from regulators and my colleagues, I can finally claim that I am the civil servant. informal accounting guidelines that I believe will apply to the most common SAFE agreements. This accounting treatment was reviewed and approved by the SEC on the basis of actual facts and circumstances. As a disclaimer, as all SAFES are different, this guide may not apply to all SAFE. 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. But 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: to be eligible for the classification of shares, settlement in non-registered shares « must » be authorized. The agreement allows the Company to set up in non-registered shares.

(Caution: The arguments and positions in this article apply to the standard Y Combinator SAFE instrument. In some situations, some investors have successfully negotiated a mandatory redemption or redemption of their « SAFE » contracts. These agreements are not SAFE. They are « SAFE » only in name. In fact, these amended contracts are convertible debt contracts.) We then turn to paragraph 815-40-15-7E, which says, « . Fair value inputs of a fixed date or stock option may include the Company`s share price and additional variables, including all of the following variables: To be eligible for stock classification, « (must) the Company have sufficient authorized and unmerited shares. The Company (must) have a sufficient number of approved and unsubsidized shares to perform the Contract after taking into account any other obligations that may require the issuance of Shares during the maximum period during which the derivative instrument may be outstanding. « First, the disclosure of SAFE As liabilities means that the reported equity of these companies is negative. This causes real harm to companies that need to be licensed by various state licensing authorities that tend to require positive equity. In addition, the classification of liability gives the impression that companies have an obligation to repay. This is not correct and gives investors false assurance.

The classification of responsibility gives investors a false sense of security that is out of place. For those who do not know, a SAFE is an agreement by which an investor makes an investment in a company that is converted into preferred capital when AND IF preferred capital is issued through a qualified capital increase. It is not repayable like debt, it does not bear interest like debt, and the risks and opportunities are more suited to an equity investor. .