The tax treatment of FAS is not clear and there are no IRS guidelines. The general approach to taxing new derivatives, such as FAS, is to try to categorize them into different categories of transactions for which there are established rules. These categories are commonly referred to as Cubbyholes. New financial transactions often do not fit well into a single cubbyhole, which is uncertain. SAFEs are supposed to be simple and flexible agreements that offer little room for negotiation beyond the valuation ceiling or the maximum valuation at which SAFE is converted into equity. The future share price is not indicated in the SAFE agreement and does not offer an exercise or maturity date; On the contrary, these positions will be determined in the future if there is a triggering event – either equity financing, a liquidity event or a dissolution event. In the case of a liquidity event (for example. B change of control or IPO) before the conversion, an investor receives the higher purchase price (i) of SAFE or (ii) the converted product he would have received in the event of liquidity. If there is a dissolution event before the conversion, an investor will recoup the safe purchase price. In both cases, the investor`s debt is as a result of the creditor and the outstanding debt and is the same priority as non-participating preferred shares. In summary, SAFEs offers investors equity and none of the measures to reduce debt. While the terms of the SAFEs seem to make it clear that they are not debt securities, the correct tax treatment of a SAFE is an outstanding issue and often a complexity of a SAFE, which is also overlooked by investors and companies at the time of sale. Depending on the terms of safe and the facts and circumstances relevant to its issuance, a SAFE should be treated either as equity or as a variable rate prepaid contract from the perspective of U.S.

federal income tax. In deciding whether a contract should be treated fiscally as a transfer of ownership of the underlying capital, the decisive question is whether the benefits and expenses of ownership of the underlying capital have been transferred.5 The manner in which the parties treat the transaction is a consideration in this finding.6 SAFE post-money forms contain explicit language on the intended treatment of SAFE as an ordinary share. and the language of the form generally corresponds to the tax treatment as equity. In addition, the right to dividends is another key to determining whether there has been a transfer of ownership of shares.7 Post-money SAFE gives the investor dividend rights, a missing feature in the SAFE pre-money. Finally, post-money SAFE is supposed to offer more security or less variability as to the actual percentage of investor ownership on the underlying stock.8 This uncertainty has become increasingly a problem that we see in transactions, with founders and investors striving to get a clear understanding of who owns how much of the business when it comes to determining the desired valuation and investment size.