Simple Agreement for Future Equity Journal Entry
To be eligible for the equity classification, “(there may not be) a cash payment required if the corporation does not file its return in a timely manner. There will be no required cash payments to the counterparty if the Company does not make timely deposits with the Securities and Exchanges Commission (SEC). SAFEIs are not call options, but they are similar to call options in that they confer a potential right to future shares. Since conditional entitlement to future equity (not debt) exists, SAFERs should be classified as equity in additional paid-up capital, just like call options. 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. In the absence of FASB guidance on accounting for SAFE, the SEC has taken a very legalistic and rules-based approach to dealing with SAFE.
The SEC staff`s approach shows a lack of understanding of the essential nature of SAFERs. Although the SEC has not taken an official position on the accounting for SAFEEs, SEC employees privately force small businesses that raise funds through CF regulation or SAHE Regulation A+ to classify these SAFES as liabilities. The SEC`s current practice on the subject is flawed and erroneous because it distorts the true essence of what SAFERs actually are – a risky early investment in start-ups. On the ground in Silicon Valley, where SAFES were created, the SEC`s current practice regarding SAFERs is considered inappropriate because it distorts and distorts the true nature of SAFE. Silicon Valley practitioners who work with start-ups on a daily basis understand that HESAs are early capital investments in startups. It is important to note that SAFE investors do not own any shares (neither preferred shares nor common shares) prior to the conversion of SAFE into preferred shares. Under the terms of the SAFE, it is possible for successful start-ups to continue operating indefinitely without ever performing a fixed-price equity financing round, and therefore, in such a situation, SAFES can never be converted into shares. In this scenario, SAFE investors may simply lose their investment completely without having to show anything. This possible scenario where SAFE investors completely lose their investments without gaining in return is not only hypothetical. Real cases of this kind have occurred.
Since SAFERs are not debt instruments, companies have no absolute obligation to repay the cash paid. And SAFE Can only be converted into preferred shares in the case of preferred share financing, as expressly required by safe agreements. The FASB`s definition of “monetary value” is as follows: “What would be the fair value of the cash, shares or other instruments that a financial instrument requires the issuer to transmit to the bearer on the settlement date under certain market conditions.” No such monetary value can be determined on the settlement date (conversion) until a date to be determined in the future. Technically, before converting SAFEEs, start-ups do not have enough shares allowed to issue when converting SAFE. However, for seed-stage start-ups, it is very easy to increase the number of actions allowed at will. The ability to increase the number of authorized shares of start-ups is entirely under the control of the co-founders, who typically own 100% or almost 100% of the companies` outstanding shares. As a rule, in the initial phase of start-ups with SAFE, there are no other board members than the co-founders. There are no other parties with the right to vote.
There are no external lenders with restrictive covenants. There is no barrier for start-ups to increase the number of authorized shares by an amount sufficient to issue the required number of shares when converting SAFEIs. Due to the full control of the co-founders, start-ups have the ability to authorize and issue a sufficient number of shares to successfully convert SAFERs into shares. .