Is a simple agreement for future equity a derivative?

Developed in 2013, a start-up-friendly funding mechanism called the simple agreement for future equity (SAFE) was conceived as a substitute for convertible debt. Like warrants and convertible debt, most SAFEs clearly are derivatives of the company’s equity.

Is a SAFE agreement debt or equity?

Finally, The Simple Agreement for Future Tokens (SAFT) is possibly the most unique of the four types of convertible instruments because it is the only type of convertible instrument that it is not debt at all, and does not convert into equity.

Is a SAFE note a liability or equity?

Although SAFE agreements are not debt in the traditional sense and an argument can be made to record them as Equity; in practice, we see SAFE agreements recorded as long-term debt.

Why SAFE notes are not SAFE for investors?

Risks to investors: SAFE notes are not an official debt instrument. This means there is a chance they will never convert to equity and that repayment is not required. Incorporation requirement: A company must be incorporated to offer SAFE notes, and many startups are LLCs.

Is a SAFE agreement a security?

SAFEs are considered to be securities, like stock and convertible notes, and are thus regulated by the SEC under the Securities Act of 1933 and Securities Exchange Act of 1934. SAFEs do not provide investors with voting rights until/unless the investment converts into preferred equity.

What is a standard SAFE Agreement?

A simple agreement for future equity (SAFE) is a financing contract that may be used by a startup company to raise capital in its seed financing rounds. Future equity financing (known as a Next Equity Financing or Qualified Financing), usually led by an institutional venture capital (VC) fund.

What is the purpose of a simple agreement for future equity?

A simple agreement for future equity (SAFE) is an agreement between an investor and a company that provides rights to the investor for future equity in the company similar to a warrant, except without determining a specific price per share at the time of the initial investment.

Are SAFEs considered securities?

Are SAFEs a debt instrument?

In practice a SAFE enables a startup company and an investor to accomplish the same general goal as a convertible note, though a SAFE is not a debt instrument. A SAFE is an agreement that can be used between a company and an investor. The investors invests money in the company using a SAFE.

Can LLC issue SAFE?

SAFEs – Yes, there are LLCs now doing SAFEs, although the SAFE instrument requires tweaking (like convertible notes) to make sense for an LLC. LLC SAFEs are even rarer than C-Corp SAFEs, but they do come up.

How does a SAFE agreement work?

What is a simple agreement for Future Equity (SAFE)?

A simple agreement for future equity (SAFE) is an agreement between an investor and a company that provides rights to the investor for future equity in the company similar to a warrant, except without determining a specific price per share at the time of the initial investment.

What is a safe agreement?

A SAFE (simple agreement for future equity) is an agreement between an investor and a company that provides rights to the investor for future equity in the company similar to a warrant, except without determining a specific price per share at the time of the initial investment.

Can a safe note be converted to equity without a conversion?

Going without a qualifying transaction obligation can help since this would prohibit a conversion to real equity. Since SAFE notes are not a debt instrument, there is no maturity or end date. An end date can force a conversion to equity and provide a right to equity conversion via the valuation cap.

Is a safe equity or a variable prepaid forward contract?

Depending on the terms of the SAFE and the facts and circumstances relevant to its issuance, a SAFE should be treated as either equity or a variable prepaid forward contract from a U.S. federal income tax perspective. Classic debt instruments call for the payment of principal at a fixed point in time and bear interest at an arm’s-length rate.