Simple Agreement for Future Equity Accounting Ifrs

Many companies in the development phase need bridge financing. They are increasingly attracted to standardised instruments such as Simple Agreements for Future Equity (SAFE) and Keep It Simple Securities (KISS). However, the accounting, legal and operational details associated with these agreements are not always simple, regardless of their name. While instruments may qualify as “inequality” or entitle you to a return similar to that of shares, they should not lead to a classification and measurement of equity for accounting purposes. SEC staff are a strange group of people who actually seem to believe that any accounting issue can be resolved with rigid and rigid rules that must be prescribed without and in authority over any professional judgment. They are the opposite of the global push for a more principled accounting regulatory system. (In fact, they are probably the main reason for the global push for a more principled accounting regulatory system.) I had clients who wanted to classify SAFERs as long-term debt and others as equity. Through lawsuits and procrastination, scrutiny from regulators and my colleagues, I can finally claim that I am the civil servant. informal accounting guidelines that I believe will apply to the most common SAFE agreements. This accounting treatment was reviewed and approved by the SEC on the basis of actual facts and circumstances.

As a disclaimer, as all SAFES are different, this guide may not apply to all SAFE. For SAFERs, the key variables that will affect the settlement amount are the price of the future preferred share as traded in the future preferred share funding round (if and when) and the conversion price, which depends on both the valuation cap traded in the SAFE agreement and the number of fully diluted outstanding shares. SAFEIs are financing instruments in which angel or seed investors give money to start-ups in exchange for the possibility of their investment being converted into future shares – but only when certain future events occur. As a form of financing, funds from these agreements should be classified as follows: (i) debt; (ii) equity; or (iii) something in between – what`s called “mezzanine” or temporary equity. In the SEC`s view, SAFERs are considered debt rather than equity and should therefore be reported as debts on the balance sheet. I`m not going to bore you with their reasoning, which most people (including most accountants) find dubious at best. Suffice it to say that the SEC`s SAFE reasoning, to the extent that it is sound, would also apply to naked warrants. What we have seen, the FASB/GAAP certainly said is accounted for as equity. 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. 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. It is instructive to look at the aspect of control over a start-up and whether or not SAFE holders could force a cash payment or refund of their SAFE without the consent of the company`s current shareholders. The clear answer is that no, SAFE holders never force such a buyout. Co-founders typically own 100% or nearly 100% of the company`s outstanding shares, and therefore exercise full control over the company and have the ability to retain full control. SAFE holders could never force the withdrawal of their SAFE. The reality of full control over co-founder-owned start-ups strongly suggests that SAFERs should be accounted for as equity rather than debt. Of course, not everyone is satisfied with them. Specifically, SAFECs have increased downside risk for early stage investors. In addition to the obvious and well-known risk of a business collapse, SAFE investors now also face the unexpected risk that successful start-ups will achieve self-sufficiency and never conduct a low-cost funding cycle (as they don`t need to) and therefore never be forced to convert SAFE funds into stocks or repay the money contributed. This is a potential negative outcome that does not occur most of the time, but occurs frequently enough to have become a sore point for some investors in the seed phase. When assessing the accounting for such types of funding alternatives, issuers should take into account the guidelines applicable to financial instruments not issued in the form of outstanding shares.

We then turn to paragraph 815-40-15-7E, which says, “. Fair value inputs to a fixed futures contract or stock option may include the Company`s share price and additional variables, including one of the following variables: ASC 480-10-25-14 states in part: “A financial instrument . the fact that the issuer must or can settle accounts by issuing a variable number of its shares should be classified as a liability. whether the monetary value of the bond at the beginning is exclusively or mainly . a fixed amount of money known at launch (for example. B an affordable number with a variable number of shares of the issuer). This is Article 1(a). It`s in the front and middle. This is the expected result in the normal course of things. Early stage investors and start-up founders understand and intend that, in the normal course of events, funds invested under SAFE instruments will be converted into preferred shares in future financing, both hoped and expected, in which newly created preferred shares will be issued. That is hope.

That is the intention. But that`s never guaranteed. Early stage investors in SAFE Take a big risk in the hope of significant returns. This is a high beta proposition. The legal substance of SAFEIs is that the investor deposits money into the start-up in exchange for the uncertain hope of preserving future stocks – shares that do not yet exist. The SAFE investor now receives absolutely nothing in exchange for his contributed capital – no seat on the board of directors, no voting rights – nothing but the uncertain possibility of future justice. The SAFE investor is exposed to a significant risk of never receiving anything for his investment and completely losing his investment without doing so. Therefore, the debt classification is not appropriate for SAFERs.

SAFERs should be classified as additional paid-up capital within permanent own funds. For SAFERs, there is no other appropriate classification in the balance sheet. 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). Simple Agreement for Future Equity (SAFE) has become an attractive way for companies, usually startups or early-stage companies, to raise funds profitably. But contrary to what its name suggests, charging prices has proven to be anything but easy. At present, the Financial Accounting Standards Board (FASB) has not issued specific guidelines for the accounting of SAFERs, which has led to some divergence in how SAFERs are accounted for at the time of issuance. Some SAFERs involve or are linked to a share repurchase obligation that requires the issuer to settle through a transfer of cash or other assets and, as such, are considered a liability of the issuer.

Instruments that allow the investor to receive shares of the Company in exchange for cash or other assets, even if only for certain contingencies, and that are related to the Company`s share price, are generally also liabilities. In addition, SAFERs often include a conditional obligation related to a company`s shares that requires the issuing company to transfer cash or other assets to certain contingencies. These events may include a liquidity event or a capital increase, which may result in a possible classification of liabilities and recognition at market value. 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. A SAFE investor will only bring money to a start-up in exchange for a very uncertain and conditional potential outcome of its cash investment, which will be converted into preferred shares in the future if the start-up company is successful enough to attract future preferred stock investors and the company`s co-founders choose to conduct a preferred share financing round. .