This requirement is clearly met. „Contract Underlying Shares“ are preferred shares that have not yet been approved or issued and therefore do not yet exist. However, the effective rights of SAFE holders are less than the rights of common shareholders. Indeed, safe holders have no rights. Although the STANDARD SAFE agreement asserts certain rights to THE HOLDERS OF SAFEs, safe holders do not have the possibility to assert their rights. SAFE holders cannot vote. SAFE owners do not have representation on company boards. The sale of their stake is entirely under the absolute control of the co-founders, who are also the majority shareholders of a startup. SAFS are financing instruments in which fishing or seed stage-venture investors give money to start-ups, in exchange for the possibility of converting their investment into future equity, but only if certain future events occur. As a form of financing, the resources of these agreements should be classified as either: (i) debt; (ii) own funds; or (iii) something in between – the so-called „mezzanine“ or temporary equity. „A SAFE is an agreement between you, the investor and the company, in which the company usually promises to give you a future stake in the company if certain triggering events occur.“ As explained and described in the previous sections, SAFEs are contractual agreements between the company and investors that give investors the right to obtain shares (i.e. preferential shares) in the future in the event of the occurrence of certain triggering events.
They are therefore contractual derivatives of its own funds. Accordingly, SAFEs should be considered as equity instruments. Technically, SAFE contracts do not explicitly limit the number of shares to be issued. But of course, the number of shares to be issued is effectively limited by the SAFE agreement. The conversion price, if SAFEs are converted into shares, is calculated as the lowest of: 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 when certain triggering events occur. An investor only obtains a stake in the capital of a SAFE company if the specific conditions of the security are met. If the conditions are not met, the investor has no choice. The clear implication is that SAFEs are not debts. To classify them as debts that involve a certain amount of payment within a specified period of time would be misleading.
„A safe is like a convertible loan, because the investor does not buy shares himself, but the right to buy shares during a stock turn when it occurs. A safe may have a rating cap or not be limited as a rating. But what the investor is buying is not debt, it is rather a kind of warrant. It is therefore not necessary to set a maturity or determine an interest rate. The introduction of SAFE by Y Combinator is a great example of what Silicon Valley can do best – innovations to make business cleaner, easier, faster, better and more accessible to start-up creators. Startup creators and their colleagues are extremely busy people and their working time is most valuable in developing their technology, setting up their teams and serving their customers, not for administrative burdens such as renegotiating convertive debt contracts with impending maturities weighing on them. SAFE is a simple but brilliant innovation that protects startup creators from unnecessary administrative burdens and allows them to focus on building their business. I have had a few clients who want to classify SAFE as long-term debt and others as equity. Thanks to legal proceedings and confusions, verification by regulators and colleagues, I can finally say that I am the official. Unofficial accounting guidelines, which I think will apply to most common SAFE agreements. This accounting treatment has been audited and approved by the SEC on the basis of actual facts and circumstances.. .