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.
- Background:
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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