The underlying concepts of a convertible loan are known and are generally in the form of a guaranteed or unsecured short-term loan contract, with a specified interest rate and maturity date, which can then be converted into the company`s equity after a successful future financing cycle (often with a discount). The legal substance of SAFEs is that the cash investor in start-ups in exchange for uncertain hopes of future equity – shares that do not yet exist. Now, the SAFE investor has absolutely nothing but his under-piloted capital – no board seat, no voting rights – just the uncertain possibility of future equity. The SAFE investor faces a significant risk of never getting anything for his investment and, on the contrary, of losing his investment completely without opposing himself. Therefore, the debt classification is inappropriate for FAS. FASD should be classified as additional paid-out capital within permanent capital. For FAS, there is no other appropriate classification in the balance sheet. Commissioner Piwowar describes a SAFE as “an agreement between an investor and a company in which the company generally promises to give the investor a future stake in the company if certain triggering events occur… An investor only obtains a stake in a SAFE company if the specific security requirements are met.
If the conditions are not met, there will be nothing left for the investor. The conclusion is that FAS is not debt. It would be misleading to label them as debts, which implies a certain amount of payment within a specified period of time. The launch of safe by Y Combinator is a great example of what Silicon Valley does best – innovation to make businesses cleaner, simpler, faster, more efficient and accessible to startup creators. Startup creators and their colleagues are very busy people, and their working time is most valuable for developing their technology, building their teams and caring for their clients – not for administrative burdens such as renegotiating convertible debt contracts with imminent maturities that settle on them. SAFE is a simple but brilliant innovation that protects startup creators from unnecessary administrative burdens and allows them to focus on the development of their business. First, let`s explain why this guide is so important. Reg CF is accelerating, and by the end of 2017, I expect that somewhere between 600-800 companies have been campaigned or will actively go through one. That`s a lot of companies in about a year and a half. Currently, general statistics indicate that SAFE agreements account for about 20-25% of the current Reg CF increases. Many companies will support these investments on the balance sheet, many of which will have to report to their investors in the years to come. ASC 815-40 is complex, but the basics are not there.
CSA 815-40-25-1 states: “The initial classification of the contract balance under this sub-topial is generally based on the idea that 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.