Tax Treatment Of Simple Agreement For Future Equity

In a futures contract, one party agrees to purchase a fixed amount of the property from the other party at a fixed price on a fixed date. Legally, it is a bilateral enforcement contract. The forward buyer is betting that the price of the underlying property is increasing and that the forward seller is betting that it is falling. Futures contracts can be paid in advance – if the purchase price is paid at the time of the term contract performance or after payment – if the purchase price is paid at the time of payment of the futures contract. They can also be charged physically in the property, or paid in cash with a sum of money corresponding to the difference between the price of the contract and the value of the property when the contract expires. If the number of shares to be acquired under a futures contract is variable (for example.B. depends on the future price of the underlying asset), the contract is called a variable futures contract. Variable prepaid contracts are quite common in the market and are generally used in monetization transactions with low-level stocks. Conventional debt securities require the payment of capital on a fixed date and carry interest at an arm-length rate. On the other hand, conventional equity instruments give the investor the right to participate in the profits of the underlying transaction, but are not allowed to withdraw the investments made to acquire the instrument; On the contrary, the investment is subject to the risks of the company. Many instruments bear both debt and equity. For example, convertible bonds may, in certain circumstances, be considered equity.4 It seems clear, however, that a SAFE should not be considered a debt for income tax purposes in the United States. which is consistent with Y-Combinator`s original intention to create SAFE as an alternative to converting debt.5 Perceptions and effects are set aside, the basic safe conditions are as follows: The investor pays a purchase price for the 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. SAFEs generally have a valuation ceiling and/or a discount and convert into equity at a price per share based on the valuation ceiling and/or the discount.