As shown in the table above, the SAFE investor`s debt decreases with the increase in valuation before the money. The valuation target rises to $5,000,000 and predicts that, although the equity investor accepts a higher pre-money valuation, the SAFE investor will not fall under a certain claim (in this example, the new issue of 10% of the issued and outstanding shares). Y-Combinator has designed SAFEs as quick and simple documents. However, complexities are likely to occur or be recognized after SAFE exposure. As stated in this article, a complexity often overlooked by investors (and businesses) is the tax treatment of FASCs. If a SAFE is not treated as a pre-equity, investors who buy FASCs instead of equity delay the start of the capital clock (one year) and the “Small Business Stock” watch (and perhaps because of this delay) to significant tax benefits. Investors and issuers should discuss the tax treatment of receiving a safe based on the particular circumstances in which SAFE was issued. While it seems clear that a SAFE should not be considered a tax debt, it is advantageous for a SAFE holder to understand in advance the treatment of SAFE for tax purposes, as it may influence the benefit of the provision of the action underlying SAFE. The Y Combinator Accelerator in Silicon Valley introduced SAFE for the first time at the end of 2013 due to the relatively high volume of Early Stage agreements. A SAFE was a simple and effective method of financing to obtain the initial capital of a company. According to Y Combinator: To determine whether an instrument is a debt or capital of U.S. federal income tax, 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.