Thus, the FASB has done nothing to clarify twice that convertible financial instruments with characteristics such as the entity`s SAFes are not necessarily tradable, so this requirement for debt processing is not triggered. To complicate matters a little, a SAFE will sometimes have a discount. Since the SAFE will be in front of each investor later, the SAFE investor may want the SAFE to be converted into equity into a discount on the subsequent financing cycle. Discounts are usually between 10% and 30%. As an illustration, I`ve modeled what 50% off will look like. Instead of buying shares for $1.00, the safe bearer receives shares for $0.50. Here`s an example: In addition to the insult to injury, the SEC privately requires that FASS be counted as debt derivatives. This forced treatment has led to extreme accounting complexity. It requires start-ups to estimate the fair value (not face value) of SAFE instruments and to make periodic expenditures for the increase in the fair value of FASCs over time.
In a word, it is totally absurd. And SEC employees mandate all of this, even though the SEC has publicly admitted that FASCs are „different from“ convertible bonds and that SAFEs do not constitute a legal obligation of a company to repay money financed by investor contributions. 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. To be eligible for the capital classification, „the company must have authorized and un issued shares. The entity (must) have sufficient authorized and unreased shares to settle the contract after all other obligations that may require the issuance of shares during the maximum period during which the derivative instrument may be pending have been taken into account.“ The benefits of SAFE favour the business more than investors, but they can still be a useful tool. As with convertible bonds, FAS can include economic safeguards such as rebates and valuation caps; and if the company is dissolved, SAFE holders will be reimbursed on liquidated assets before shareholders receive distributions. In addition, you may eventually invest in a company that is otherwise unwilling to issue preferred shares, but wants to avoid large debts on the balance sheet. 1 See blog.ycombinator.com/announcing-the-safe-a-replacement-for-convertible-notes/ (called 20.04.2018) and www.ycombinator.com/documents/ (called 20.04.2018).2 Id.3 See Edward Zimmerman, „The Damaging Shortcuts Entrepreneurs Take When Raising Money,“ The Wall Street Journal (April 30, 2018) („There is no doubt that SAFE and KISS documents will be faster and cheaper – when the deal is concluded for the first time.