We then continue with paragraph 815-40-15-7E, which says: “… The entry to fair value of a fixed-rate maturity or stock option may include the company`s price and additional variables, including all the following variables: First, reporting FAS as liabilities results in the reported equity of these entities being negative. The result is real harm to companies that need to be licensed by different public licensing agencies that tend to need positive capital. In addition, the classification of liability gives the impression that companies have a obligation to repay. This is not correct and there is false insurance for investors. The classification of liability gives investors a false sense of security that has no place. CSA 718-10-25-8 states in part: “… a written call option on an instrument that is not considered a liability… are also classified in equity… “The legal substance of SAFEs is that the cash investor in start-ups in exchange for the uncertain hope of obtaining future equity – shares that do not yet exist. Now, the SAFE investor has absolutely nothing but his under-piloted capital – no board seat, no voting rights – just the uncertain possibility of future equity. The SAFE investor faces a significant risk of never getting anything for his investment and, on the contrary, of losing his investment completely without opposing himself. Therefore, the debt classification is inappropriate for FAS.
FASD should be classified as additional paid-out capital within permanent capital. For FAS, there is no other appropriate classification in the balance sheet. One of the biggest attractions for the founders for SAFS is the ability to close financing with an investor on an individual basis, instead of coordinating a single deal with several investors – often a stressful and costly process. This function creates a staggered revaluation process that allows the founders to better manage the amount of equity to be offered (so that they are not diluted more than necessary) and to ensure that the company is not over-hospitalized. Another advantage is that issuers spend less on lawyers and save time to negotiate, since the agreement does not have complex terms compared to traditional funding methods. Since there are no maturities or deadlines for financing equity, founders can focus on growing their businesses without the overstlying stress of debt or financing delays. If you`re involved in start-ups, you`ve probably heard the term “safe.” Y Combinator launched a simple agreement for future equity, better known as SAFE, in 2013 as an inexpensive, simple and fast way for start-ups to raise capital. While FASAs have not become as popular in Canada as they are south of the border, they are developing as an alternative to more traditional forms of early financing, such as convertible bonds or preferred shares.
The factors currently unknown in the calculations above are, of course, the share price of future preferred shares and the number of shares outstanding fully diluted at the time of the conversion of FAS. SAFE investors take the biggest or most of the risk because there is no guarantee of participation in the company.