Safe Simple Agreement For Future Equity Tax Treatment
Developed in 2013, the start-up financing mechanism, the Simple Future Capital Agreement (SAFE), was designed to replace convertible bonds. You may be one of the many investors who have acquired safe stakes in start-ups. Safs or simple agreements on future capital were put in place at the end of 2013 by Y Combinator in place of convertible bonds. They are a popular opportunity for start-ups to raise capital and are often privileged over convertible bonds because they do not bear interest, have no maturity date and are only converted to equity when certain pre-defined criteria are met. Futures contracts are subject to open tax treatment. There are no tax consequences for the parties when the contract is concluded and the seller takes into account every amount that is collected as part of the contract when the contract is executed. The fact that some or all of the purchase price was paid in advance under a futures contract does not change its overall tax treatment. In 2003, the IRS issued a published judgment confirming the open treatment of the transaction tax on variable rate prepaid futures contracts. In determining whether an instrument is an instrument of debt or equity for U.S. federal income tax purposes, a number of factors are taken into account by the IRS and the tax court. Factors taken into account include (1) the question of the existence of a fixed due date and payment schedule; 2.
if there are interest payments and if these interest payments are at a fixed rate; 3. if there is a right to enforce the payment of principal and interest; 4. if the repayment obligation is unforeseen; (5) the existence of a subordination or preference for the company`s debts; (6) the company`s debt ratio; (7) if the instrument is converted into the company`s equity; (8) the relationship between the company`s thought stocks and the holdings of the instrument in question; (9) the names given to the instrument (for example. B when the parties mention the liabilities of agreement); and (10) the intent of the parties.6 No factor is control or determining whether an instrument is a debt or capital for tax purposes; However, the absence of a fixed maturity for the repayment of a given amount often excludes the debt status of an instrument7.7 A creditor`s return is based on the present value of the money, while a shareholder benefits from the growth of the business. When an instrument gives the investor the right to participate in the growth of the business, the instrument can be considered a clean fund, even if it is called «debt.» For example, the IRS found that convertible bonds are treated as equity when the probability of converting debt into common shares was very high.8 Perceptions and side effects, the safe base conditions are: The investor pays a purchase price for SAFE. If there is equity financing after the purchase of SAFE, the entity must automatically transfer to the investor a number of preferred shares that vary depending on the safe structure and its conversion mechanics.