The reason everyone understands how to account for and report priority shares mandatorly is that the FASB has written rules based on fundamental principles governing the accounting and disclosure of those shares. The overall consistency in the accounting and reporting of non-exchangeable convertible preferred shares is explained by the fact that the FASB has codified the following rules. The reason for the general convergence in the accounting and reporting of derivatives, while complex, is that the FASB has presented guidelines. We need the same type of guidance for accounting and information for FAS. The Simple Agreement for Future Equity (SAFE) has been around for several years. Although it has its critics, it is one of the most common forms of financing high-risk/reward start-ups at the beginning of the period. As an alternative of equity to convertible securities, SAFEs are generally accounted for as equity on a start-up`s balance sheet. (Away from the balance sheet, debt is one of the characteristics that SAFE supporters are an advantage over conventional convertible debt instruments).) To be eligible for the capital classification, “there is no need to obtain guarantees. There is no obligation in the contract to file guarantees at any time or for any reason. On the one hand, if you apply GAAP principles (the “P” in GAAP, remember, means “principles”), the answer seems quite clear: SAFes are justice. On the other hand, the FASB has not been directly interested in safe accounting, as obvious as it may seem that FASEs should be treated as equity after GAAP, the problem is not quite black and white.
And now, a powerful federal regulator, in the form of the SEC, suggests that in the absence of a real GAAP rule that goes directly to SAFES, it thinks that FAS should be counted as debt. It is important to note that SAFE investors do not hold shares prior to the conversion of SAFE into preferred (neither preferred nor frequent) preferred shares. Under SAFEs` terms, it is possible that successful start-ups can continue to work indefinitely without ever conducting a price financing cycle, and that, therefore, in such a situation, SAFEs will never be able to convert into equity. In this scenario, SAFE investors may simply lose their investment completely without this being demonstrated. This possible scenario, namely that SAFE investors lose their investments completely without there being anything in return, is not only hypothetical. In fact, there have been cases. Since SAFA are not debt securities, companies are not required to repay the money paid. And FASCs can only be converted into preferred shares in the case of preferred share financing, as expressly stipulated in the SAFE agreements. It is instructive to examine the control aspect of a start-up and determine whether SAFE owners could impose a cash payment or withdrawal of their SAFEs without the consent of the company`s current shareholders.