The perceptions and effects aside, the basic safe conditions are as follows: 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. 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. If the SAFE z.B. contains an valuation ceiling, the processing price is capped (i.e. it must not be higher than the price per share on the basis of the valuation ceiling). If there is a discount, the investor can generally choose to use the advantage of the discount price or the cap valuation price. In a typical SAFE, the investor makes funds available to the issuer in exchange for the right to acquire equity in the future after the arrival of a triggering event, such as. B the conclusion of a capital financing price cycle, the sale of the business or the dissolution. It is fully paid in advance and the investor has not paid a financing commitment on the purchase price of safe. Safe ends after being converted to equity. I am particularly interested in the tax impact from the company`s point of view. Since all you sell is the right to equity at a reduced rate, how can you submit the income from executing a SAFE investment? Do you have any ideas about the SAFE instrument in general? I own equity in a C company that is considering one, and I would be grateful for every board.
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 has found that convertible bonds are considered equity when the probability of a debt conversion into common shares is very high.8 For legal reasons, convertible bonds are issued as an integrated guarantee, unlike an investment unit made up of separate or separable components. Federal income tax rules generally respect the integrated nature of the convertitive debt and do not incorporate it into its components, even though such an approach would be consistent with the tax treatment with the underlying economy. There are circumstances in which convertible bonds can be treated as equity and not as debts. B for example, if the call option on board the issue is deep in the money and there is a very high probability that the debt will be converted into shares, but such a treatment is the exception rather than the rule, and we start from the rest of this discussion about debt treatment.