There are several options currently available for startups that want to structure investments. One of the most traditional and well-known ways to ensure early financing is the Baron of Deafness. Another option that is becoming more and more prevalent in the market is SAFE (simple agreement on future capital). This requirement is clearly met. The “underlying share of the contract” is a preferred share that has not yet been approved or issued and therefore does not even exist. But the actual rights of SAFE holders are less than the rights of common shareholders. In fact, safe owners have no rights. Although the standard security agreement grants certain rights to FAS holders, SAFE holders are not in a position to assert their rights. SAFE holders cannot vote. SAFE holders are not represented on the boards of directors of companies. The sale of their investment is entirely under the absolute control of the co-founders, who are also majority shareholders, of a start-up. This is where the debate begins on how FASD can be properly accounted for in your company`s balance sheet.
We have received a number of questions about this. Some argue that SAFE are essentially warrants for the company`s future actions. They should be treated as such for accounting purposes and be accounted for with a value equal to the amount of the capital contribution. The value of the SAFE would vary with the value of the business, but due to the existence of the valuation ceiling, it would not have a completely linear relationship with the value of the business. FASS are not call options, but they look like call options because they give a potential right to future equity. Since the conditional right to future capital (not debt) is in place, FASAs should be considered as equity in the additional released capital, as the appeal options are. To be eligible for the capital classification, “the unregistered stock count must be allowed. The contract allows the company to establish itself in unregistered shares. The factors currently unknown in the calculations above are, of course, the share price of future preferred shares and the number of shares outstanding fully diluted at the time of the FAS conversion. And in Silicon Valley, accounting for SAFE is just as simple – SAFS are equity contributions from early investors in start-ups. FAS is not debt. The idea that someone is discussing the fact that they could go into debt is strange and ridiculous for the financial professionals who work in Silicon Valley. SAFEs were created to avoid debt overcompensation! (Of course, some “FAS” have a repayment obligation after a specified period of time.
Such “SAFEs” are of course only SAFEs in the name. Essentially, instruments with such clauses are nothing more than convertible debts under another name.) Although FAS is not liable for any of the above reasons, they may not meet capital classification requirements, for example because of rights greater than those of the shareholders of the underlying share and/or an explicit limitation on the number of shares held during the liquidation. The stated conclusion of this part of the CSA is that, Since the number of shares to be awarded is not explicitly identified as a fixed number, the actual number of shares to be issued in the future may be greater than what the entity approved at that time and is available for issuance, and therefore the net stock tally (a capital classification requirement) is not under the control of the company.