Delaware Term Sheet - Simple Agreement for Future Equity (SAFE)
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How to fill out Term Sheet - Simple Agreement For Future Equity (SAFE)?
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FAQ
Accounting Perspective From an accounting standpoint, there is some debate over whether a SAFE note should be classified as a liability or equity on the balance sheet. This is because a SAFE note has characteristics of both debt (a liability) and equity.
Suppose a SAFE is issued with a 20% discount. This means if the SAFE investor invested $40,000 in a startup whose price per share at the time of future investment comes out to be $10, he'll get the share at a 20% discounted price, which is $8. This means he'll get 5000 shares instead of 4000.
term investment is an account on the asset side of a company's balance sheet that represents the company's investments, including stocks, bonds, real estate, and cash. Longterm investments are assets that a company intends to hold for more than a year.
A SAFE note is a security that is going to convert to stock at a future point, usually at a pre-negotiated price cap. Let's look at an example. A person might invest in a SAFE note with a $10 million cap. If the company is bought for $100 million, that's great news.
In recent years, SAFEs have become the most common convertible instrument due to their relative simplicity. Like convertible notes, SAFEs convert into stock in a future priced round. Unlike convertible notes, they are not debt and do not require the company to pay back the investment with interest.
SAFE vs Convertible Note However, a difference between these two instruments is that a convert is accounted for as a debt instrument, whereas a SAFE lives in the equity section of a balance sheet.
Cons: SAFE investors assume most, if not all, of the risk, in that there is no guarantee of any equity ownership in the company. ... A SAFE holder is not entitled to any company assets in the event of a liquidation.
SAFE notes are classified as equity on the balance sheet until conversion ? learn about how to account for SAFE notes.