Whether a Simple Agreement for Future Equity (SAFE) qualifies as Qualified Small Business Stock (QSBS)

• Tax Treatment
• The IRS has not issued definitive guidance on the relationship between SAFEs and QSBS, leading to an ongoing debate. One perspective suggests that SAFEs may be viewed as prepaid forward contracts rather than equity, and that the QSBS eligibility period commences upon stock delivery. Conversely, some tax experts argue that all SAFEs should be considered as equity for QSBS purposes.
• SAFE Note Clauses
• Certain legal firms incorporate clauses in SAFE notes asserting that the notes should be treated as common stock for tax considerations. Under this interpretation, the QSBS eligibility period would commence at the execution of the SAFE note.
• Investor Caution
• Investors are advised to exercise caution regarding using the SAFE note holding period to fulfill the QSBS five-year requirement until the IRS provides clarity on the matter.