Income Tax Treatment of SAFEs and Convertible Debt: Navigating Sections 1202 and 1045, Section 368, Section 83

Convertible notes and SAFEs are common investment instruments used by startups and other businesses seeking to raise capital between priced financing rounds. However, the tax characterization of such instruments is not always clear, and the use of these instruments could have a negative tax result for certain investors in the absence of efficient tax planning.

Counsel representing emerging growth companies and their investors must carefully consider the tax implications of each financing mechanism to evaluate the preferred structure for a particular deal while also avoiding negative tax consequences.

Listen as our authoritative panel discusses the typical structures of SAFEs and convertible debt, key tax considerations for these transactions, navigating potential negative tax consequences for taxpayers, and the impact of Sections 1202 and 1045, Section 368, and other tax provisions.

I. Overview of utilizing SAFEs and convertible debt

II. SAFEs: key terms and tax implications

A. Treatment for federal income tax purposes (Sections 1202 and 1045)

B. Tax treatment for purposes of Section 368

C. Tax treatment for purposes of Section 83

III. Convertible notes: key terms and tax implications

IV. Best practices and pitfalls to avoid

The panel will discuss these and other key issues:

• What are the typical terms of a SAFE?
• What are the tax implications for utilizing SAFEs?
• What are the tax implications of SAFEs under Sections 1202, 1045, 83, and 368?
• How does the tax treatment of a SAFE differ from a convertible debt instrument?