What Is a SAFE Agreement and What Tax Implications Should Be Considered Under the Updated Israel Tax Authority Guidelines
A SAFE agreement – Simple Agreement for Future Equity. It is an investment agreement that allows companies, mainly early-stage start-ups, to raise capital without determining the company’s valuation or the price per share at the outset. Instead of agreeing in advance on all equity terms, the parties defer that decision to a later stage.
The company receives the funds on the signing date, and the investor receives a future right to receive shares if a conversion event specified in the agreement occurs. Unlike a classic loan, there is generally no interest and no fixed repayment date. This makes it a tool that allows an early investment to be completed with relative simplicity.
In practice, the agreement is particularly suitable for situations where the company is not yet ready for a full investment round or broad due diligence but needs funding now. The assumption is that at a later stage, when a larger investor joins or a broader financing round takes place, it will be easier to determine the company’s valuation based on more established data.
In most cases, the early investor receives a pre-agreed benefit, usually a discount or a valuation cap, and the allocation itself is carried out according to the terms of the future financing round.
The precise terms of a SAFE agreement vary from one transaction to another, but the general idea is similar: the funds are provided to the company now, and the company allocates the shares only at a later stage, when a pre-agreed event occurs, such as a financing round or the sale of the company.
Tax Implications of a SAFE Agreement
On 29.1.2025, the Israel Tax Authority published updated guidelines regarding the tax aspects of an investment in a company through a SAFE agreement, following previous guidelines published in May 2023. The updated guidelines were intended to clarify points that remained open under the previous framework, add practical conditions, and provide greater certainty regarding the classification of SAFE transactions for tax purposes.
One of the main issues addressed by the guidelines is the classification of the economic benefit created for the investor when the shares are allocated. In other words, the gap between the investment amount transferred to the company and the value of the shares allocated later under the conversion mechanism. The Israel Tax Authority sought to clarify when this is a benefit in the capital sphere only, and when an argument may arise that the gap also includes a component resembling interest income.
In short, the guidelines establish a route under which a SAFE investment may be treated as an advance payment on account of shares, rather than an arrangement that is more similar to a loan, provided that certain conditions are met with respect to both the company and the wording of the agreement. This route is mainly relevant for private Israeli companies in the high-tech sector, and assumes an agreement aimed at the allocation of shares or rights to shares, without regular loan characteristics such as interest, unusual collateral, or a general right to repayment.
The updated guidelines also expand and refine the conditions. Among other things, they set an investment cap of up to USD 20 million per investor, expand the reference to include rights to shares, provide that the allocation will take place upon the earliest of several pre-defined events, and allow, under certain conditions, a pre-determined allocation date set in the agreement. They also address a qualified financing that requires allocation, limitations on changes to the discount over time, exceptional cases in which the investment principal may be returned to the investor, and cases in which the shares may be sold within a relatively short period.
The bottom line is that it is not enough to label an agreement as “SAFE”. The wording of the agreement and the circumstances of the investment should be examined in advance.
How Should It Be Done Properly?
First, the agreement should be tailored to the identity of the parties, rather than automatically relying on a generic form. An agreement that may suit a private Israeli investor who is not a related party will not necessarily suit a related foreign company or an investor seeking broader protection mechanisms.
Second, the tax implications should be reviewed in advance in the main scenarios of the investment’s life cycle: a financing round, an exit, liquidation, the absence of a conversion event, and changes in the holding structure. Sometimes a focused tax memorandum or a short analysis of the agreement can create clarity and prevent disputes later on. In other cases, especially where there are international aspects or special relationships between the parties, it may be appropriate to consider broader economic documentation and even an application to the Israel Tax Authority, where relevant. At the practical level, it is advisable to check already at the drafting stage whether the agreement meets the conditions set out in the updated guidelines, including with respect to the types of allocation events, the discount structure, the possibility of repayment, the absence of financing expenses, and whether the financing may be considered a qualified financing.
It is also important to ensure full alignment between the wording of the agreement, the accounting treatment, the company’s documents, and the parties’ conduct in practice. A gap between what is written and how matters are recorded or implemented may weaken the position of both the company and the investor. In particular, when seeking to rely on the updated Israel Tax Authority guidelines, there is value in ensuring that the investment documents, corporate approvals, presentation in the financial statements, and actual conduct all support the position that the arrangement is an advance payment on account of shares, and not an arrangement that falls into a route that may be examined as a debt-like instrument or as a mixed arrangement.
Finally, a SAFE agreement should be viewed as part of the company’s broader planning, not merely as a point solution for raising capital. Even at an early stage, it is advisable to consider how the agreement will affect the cap table, future investors, subsequent financing rounds, and additional corporate events. When several SAFE agreements exist, the relationship between them should be addressed in advance, including how the conversion will take place in each future round and how each investor’s rights will be calculated. Proper documentation and consistency among the transaction documents can reduce disputes, prevent delays, and avoid difficulties later on, especially when the company grows and becomes subject to reviews by investors, accountants, or the tax authorities.
At the same time, at the signing date there is usually still no full certainty regarding the scope of dilution. The number of shares to be allocated to SAFE investors will only be determined later, according to the conversion mechanism set out in the agreement and the terms of the future financing round. Existing shareholders, and sometimes the founders themselves, therefore cannot always know in advance what the actual dilution rate will be. For this reason, before signing a SAFE agreement, it is worth examining not only the immediate need for financing, but also the cumulative effect of such agreements on the company’s ownership structure down the road.
Conclusion
A SAFE agreement may be suitable for early-stage companies, but before signing, it is worth carefully reviewing the wording of the agreement, the conversion terms, its impact on dilution, and its compliance with the Israel Tax Authority guidelines. An early review can help avoid disputes and create greater certainty ahead of the next financing round.
Nimrod Yaron & Co. specializes in Israeli and international taxation. Our team includes professionals with years of experience at the Israel Tax Authority, as well as experience at leading firms and law offices, bringing a combination of legal and economic perspective. We advise private and public companies, Israeli and foreign companies, global venture capital funds, and clients seeking focused advice in clear and accessible language. We also work with a professional network of accounting firms and law firms around the world, enabling us to provide a full package of support in cross-border matters.
If you are considering raising capital through a SAFE agreement, or are already working with an existing draft and would like to better understand the tax implications, documentation requirements, and compatibility of the agreement with the Israel Tax Authority guidelines, it is worth examining these issues in advance. A strategic review at an early stage may assist in choosing a more suitable structure, refining the documents, and reducing uncertainty before the next financing round.
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Questions and Answers
Does every SAFE agreement automatically benefit from the Israel Tax Authority’s favorable position?
No. The Israel Tax Authority guidelines apply only to SAFE agreements that meet the conditions set out in them. If the conditions are not met, the transaction will be examined based on its circumstances, and the tax classification will not be automatic.
Why are founders sometimes surprised by the effect of a SAFE on the ownership structure?
Because at the signing date it is not always clear how many shares will actually be allocated to the SAFE investors. The scope of conversion becomes clear only in the next round, and sometimes the dilution turns out to be greater than expected at the outset.
Can a SAFE agreement also be used with a foreign investor?
Yes, but this usually requires a more careful review. When a foreign investor is involved, questions may arise regarding withholding tax, transfer pricing, holding structure, and compatibility with the Israel Tax Authority guidelines.
Is SAFE suitable for every early-stage start-up?
Not necessarily. Sometimes it is an excellent tool, and sometimes another alternative will better suit the investment structure, the nature of the investors, or the company’s financing plans. What is convenient today will not always be convenient in the next round.
When is SAFE preferable to a convertible loan?
SAFE and a convertible loan are different tools, so the question is not which is “better” in absolute terms, but which is more suitable for the circumstances of the transaction. A convertible loan is generally structured like debt that may later convert into shares, while SAFE is designed from the outset to defer the allocation of shares without creating, in its standard structure, interest or a repayment date.
In practice, SAFE may be suitable when the company wants to raise capital quickly at an early stage, without yet determining a company valuation and without entering into a loan framework. A convertible loan may be more suitable when the parties want a more structured arrangement, with clearer rules regarding debt, interest, repayment, or a conversion date.
What happens if there is no financing round?
This is exactly one of the points that should be checked in advance. The answer depends on the wording of the agreement: whether there is an alternative conversion date, whether there is a right to repayment in certain circumstances, and what has been defined as an event that triggers the allocation.
Can several SAFE agreements be signed at the same time?
Yes, but in that case it is important to regulate in advance the relationship between the agreements, the order of conversion, and the way each investor’s rights will be calculated, in order to avoid disputes later on.
