When SAFEs Aren't So Safe: Part 2 of 2
A simple agreement for future equity, or SAFE, is a contract between a company and an investor under which the investor puts money into the company in exchange for a promise to issue shares in the future upon the occurrence of a triggering event (usually the company's first round of venture capital financing).
Like preferred stock or convertible debt, a SAFE enables investors to participate in a company's growth (if it succeeds) and get their money out before other investors (if it fails). But unlike preferred stock or convertible debt, a SAFE avoids the need to value the company when the SAFE is issued. SAFEs are increasingly popular tools in both angel investor rounds and equity crowdfundings.
There are two types of SAFE: the pre-money SAFE, in which the number of shares the investor gets upon a triggering event is determined right before the triggering event occurs; and the post-money SAFE, in which the number of shares is determined immediately after the triggering event occurs.
So how are SAFEs treated for accounting or tax purposes: Are they "debt"? Are they "equity"? Or are they something else in between?
Since with SAFEs it isn't possible to calculate the exact number of shares (or percentage of the company) an investor will receive when the SAFE is issued, the answer is somewhat complicated.
For tax purposes, a SAFE is not considered debt because of the following:
-- There is no fixed maturity date.
-- There is no payment schedule.
-- There is no interest.
Whether a SAFE is considered equity is more complicated.