On 16 May 2023, the Israeli Tax Authority (ITA) issued significant new guidelines regarding the tax implications associated with investing in a company through a Simple Agreement for Future Equity (SAFE). These guidelines were released in response to a request from the Israel Advanced Technology Industries (IATI) to address uncertainties related to the classification and taxation of SAFE transactions.
SAFE transactions are commonly utilized by startup companies as they offer a swift and efficient means of raising capital when the company’s valuation has not yet been determined. In a SAFE transaction, the investor commits capital to the company, enabling immediate utilization of the funds. The company, in turn, grants the investor the right to shares of the company at a future undefined date when equity financing occurs, establishing a reliable valuation for the company. Additionally, the SAFE investor is typically granted a discount rate, usually 20% less than other investors participating in the equity financing (herein the “Discount”), or the investment is converted at a maximum company value if better for the investor.
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