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Safe Agreement Debt

March 27th, 2022

Atilla Z. Baksay is a Colorado-based lawyer who practices corporate and transaction law and securities regulation. Atilla represents clients in the negotiation and drafting of transaction agreements (e.B. executive service, purchase and sale, licensing, intellectual property and SaaS agreements) and corporate agreements (e.B. restricted share transfers, stock option plans, convertible bonds / SAFE / SAFT agreements, articles of association / operating agreements, loan agreements, personal guarantees and security contracts), internal documents (e.B. employment guidelines, Separation Agreements, Employment/Independent Contractor/Consultant Contracts, B. NDA, Brokering Relationship Policies and Office Policy Memorandums) and Digital Policies (para. B example, terms of use, privacy policy, CCPA notice and GDPR notice). Atilla also reviews and provides legal advice on the security status of digital currencies and assets. After studying law, Atilla practiced international trade law at the Executive Office of the President, Office of the United States Trade Representative, where her practice included $500 billion worth of economic sanctions against goods from the People`s Republic of China. After that, Atilla joined a Colorado law firm that practiced civil litigation, where the majority of her practice consisted of construction default lawsuits. Today, Atilla`s practice covers all business matters for clients in Colorado and the District of Columbia. So what`s going on? Focusing on making the SAFE fast, easy, and cheap can cause some founders to simply download, fill in the blanks, and run with it or some form of it.

Sure, this is a potentially dangerous way to deal with a legal document, but there`s something about SAFE that makes founders feel safe. To determine whether an instrument is debt or equity for the United States. For federal income tax purposes, a number of factors are considered by the IRS and the Tax Court. If an instrument gives the investor the right to participate in the growth of the business, the instrument can be treated as capital, even if it is called “debt”. For example, the IRS has determined that convertible bonds are treated as equity if the likelihood of debt being converted into common shares is very high.8 The risk and tolerance of SAFE arrangements oppose convertible bonds. Investors may not be familiar with convertible bonds or may feel uncertain about the tax implications of the SAFE agreement. The standard for simple and flexible investment instruments are convertible bonds. 1 See blog.ycombinator.com/announcing-the-safe-a-replacement-for-convertible-notes/ (accessed 20.04.2018) and www.ycombinator.com/documents/ (accessed 20.04.2018).2 Id.3 See Edward Zimmerman, “The Damaging Shortcuts Entrepreneurs Take When Raising Money,” The Wall Street Journal (April 30, 2018) Unfortunately, this is no longer the case over time. In SAFE, KISS documents, and convertible bonds, often unresolved issues and issues that everyone banishes in side letters can make the next fundraiser more complicated and expensive, sometimes leading to negotiations detrimental to relationships at a time when the company is doing well. ยป).

4 For example, convertible bonds may be treated as equity if the entity issuing these debt securities is a start-up entity and at the time of issuance it is unlikely to be able to repay the debt without a subsequent investment that would convert the debt.5 See blog.ycombinator.com/announcing-the-safe-a-replacement-for-convertible-notes/ (accessed 20.04.2018) and www.ycombinator.com/documents/ (accessed 20.04.2018).6 See, z.B. Roth Steel Tube Co.c. Comm`r, 58 A.F.T.R.2d 86-5808, 86-5811 (6th Cir. 1986), cert. refused, 481 U.S. 1014 (1987); Succession of Mixon v. United States, 30 A.F.T.R.2d 72-5094, 72-5098-99 (5. Cir.

1972); Fin Hay Realty Co.c. United States, 22 A.F.T.R.2d 5004, 5005-06 (3d Cir. 1968); Tax Decision 83-98, 1983-2 C.B. 40. See also paragraph 385(b). Unless otherwise indicated, all references to the sections hereof refer to the Internal Revenue Code of 1986, as amended, or to the Treasury regulations promulgated therein.7 See Farley Realty Corp. v. Comm`r, 5 A.F.T.R.2d 1646, 1649 (2d Cir. 1960) (“In many cases, it has been determined that the absence of a fixed maturity date is a critical factor, which balances a taxpayer`s assertion that there was a debtor-creditor relationship between him and his beneficiary.”). 8 Revenue Ruling 83-98, 1983-2 C.B.

40 (Determination of convertible bonds as equity and not as tax obligations if the instrument has been converted into equity, unless the share price has fallen by more than 40%).9 Lucas v. North Tex. Lumber, 281 U.S. 11 (1930); Virginia Iron Coal & Coke Co., 37 B.T.A. 195 (1938), aff`d, 99 F.2d 919 (1938), cert. refused, 307 U.S. 630 (1938).10 Rev. Rul. 78-182, 1978-1 C.B. 265.11 Section 1032(a). See Chief Counsel Advice Memorandum 201025047 (22/3/2010).12 Section 1012(a).13 For more information on these topics, see Ed Zimmerman and Brian A.

Silikovitz, “Gimme Shelter: VC-Backed M&A Tax Strategies for QSBS/1202,” Forbes (July 18, 2016) (hereinafter: Zimmerman & Silikovitz Forbes QSBS).14 Section 1001.15 Rev. Rul. 2003-7, 2003-1 C.B. 363. See also IRS LMSB Coordinated Issue Paper on Variable Prepaid Forward Contracts Including Share Lending, LMSB-04-1207-077 (February 6, 2008).16 For more information on these topics, see Zimmerman & Silikovitz Forbes QSBS, cited in footnote 11, and Edward Zimmerman and Brian Silikovitz, “How Startup Founder Stock Often Triggers Unnecessary Personal Tax Hits,” Forbes (January 6, 2015). Once the business grows, it is likely to raise additional capital and subsequently increase its value. It is this result that investors are trying to achieve. The SAFE deal will be converted into shares of the company when new investors hold price rounds in the future. SAFE agreements are neither debt nor equity.

Instead, it is the contractual rights to future fairness. These rights are in exchange for early capital contributions that are invested in the startup. SAFE agreements allow investors to convert investments into shares in a price round at a later date. Overall, a SAFE can be a wonderfully simple tool that can be used to raise funds in the early stages. The key, for both founders and investors, is to understand what you`re using and get good advice as you use it. As the examples in this article show, there are some complexities of the “simple” agreement that can be solved, but usually require some foresight. Without properly considering these issues in advance, you can suddenly convert multiple SAFE, each with different terms, right next to the tipping point between using a discount and a valuation cap, without a clear path to the future, which is the opposite of the goal of using a SAFE. .

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