Simple Agreement for Future Equity Balance Sheet

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. 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 only cautiously. SAFE gives the Company the obligation to deliver a variable number of shares based on a future updated price round or valuation cap. This would usually lead you to the codification of accounting standards (“ASC”) 480-10-14, which speaks of a variable number of shares for a fixed or primarily fixed amount of money. However, this policy does not apply because the settlement of future preferred shares may be worth much more than the initial investment or never be issued.

Therefore, the final value is not primarily fixed, as would be the case if you paid for a number. 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. 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. 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.

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. As the name suggests, SAFE is an agreement under which the investor receives a pledge of future shares, usually preferred shares, upon the occurrence of a valuation event such as an acquisition or IPO. In this sense, SAFES serve the same purpose as convertible bonds, with one very important difference: there is no repayment obligation. 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.

In order to be classified as shares, “no counterparty right can be classified higher than shareholder rights. There is no provision in the contract indicating that the counterparty has rights greater than those of a shareholder in the share on which the contract is based. For SAFERs, the key variables that will affect the settlement amount are the price of the future preferred share as traded in the future preferred share funding round (if and when) and the conversion price, which depends on both the valuation limit traded in the SAFE agreement and the number of fully diluted outstanding shares. To be eligible for the equity classification, “no collateral needs to be required. There is no obligation in the contract to deposit a guarantee at any time or for any reason. »; 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. When your start-up client asks you, “How can I consider SAFE,” what does the self-respecting professional advisor say? I don`t know? It depends on who you ask? Probably equity, but until the FASB says that, maybe debt? It reminds me a bit of the old saw where different candidates for an accountant position are asked what makes a column of numbers. .