Issuers’ accounting for SAFEs

A “simple agreement for future equity,” or SAFE, is commonly used to finance early-stage private companies. Fundamentally, when investing in a SAFE, the investor transfers cash to the issuer in exchange for the issuer’s promise to deliver a variable number of shares with a fixed aggregate monetary value to the investor at a later date. SAFEs also typically include other settlement terms that are triggered by certain events, such as a change in control of the issuer or the issuer’s liquidation.

Despite the name, accounting for SAFEs can be anything but simple given the various settlement outcomes typically incorporated into the contractual terms. To determine whether the instrument should be classified as a liability or within equity, the issuer must rely on judgment and understand the complex authoritative guidance on accounting for equity-linked contracts.

In our Viewpoint, "Issuers' accounting for SAFEs," we cover pertinent accounting considerations for issuers of financial instruments with certain characteristics of SAFEs. We address how to identify the “unit of account,” which determines the instrument, or part(s) of an instrument, to be evaluated, as well as summarize and illustrate how an issuer should account for a freestanding financial instrument that falls within the scope of ASC 480 or within the scope of ASC 815-40.

Our Viewpoint features direct citations and definitions from the FASB’s Codification, as well as examples and insights compiled by Grant Thornton’s Accounting Principles Group specialists.

Download the document here.