Simple Agreement For Future Equity Example With Balance Sheet In Allegheny
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A simple agreement for future equity (SAFE) is a financing contract that may be used by a startup company to raise capital in its seed financing rounds. The instrument is viewed by some as a more founder-friendly alternative to convertible notes.
Equity represents the shareholders' stake in the company, identified on a company's balance sheet. The calculation of equity is a company's total assets minus its total liabilities, and it is used in several key financial ratios, such as the Return on Equity (ROE).
They are accounted for as equity on the balance sheet. When the Simple Agreement for Future Equity converts to preferred stock, the accounting entries are that the SAFE entry is removed and the amount is credited to preferred equity (ignoring any APIC implications).
For instance, if someone owns a $400,000 home with a $150,000 mortgage on it, then the homeowner has $250,000 in equity in the property. It's the same general concept in business—it's what owners (or partners or shareholders) own after subtracting what they owe.
The equity section of balance sheets is designed to reflect the approximate value of your business at liquidation. As the owner, assets (what you own) less liabilities (what you owe) equal your equity in the business.
For instance, if someone owns a $400,000 home with a $150,000 mortgage on it, then the homeowner has $250,000 in equity in the property. It's the same general concept in business—it's what owners (or partners or shareholders) own after subtracting what they owe.
Positive equity means a company's total assets exceed its liabilities. If, for example, a company owns $1 million in assets and owes $600,000 in liabilities, its equity is $400,000. Negative equity is when liabilities exceed assets, which can indicate financial distress.
For example, if a SAFE has a valuation cap of $10 million, and your startup's next financing round values the company at $15 million, the SAFE investor's equity will be calculated based on the $10 million cap, not the $15 million valuation.
SAFEs were first developed by Y Combinator in 2013 as an alternative to convertible notes. A SAFE agreement is a type of convertible instrument, but unlike debt instruments, SAFEs do not accrue interest or have a maturity date, making them an attractive fundraising option for early-stage startups.
