mxx1's avatar

SAFE Phoenix – invention of the day

In my time I have seen quite a few Phoenixes (don’t really know what the plural of Phoenix is, to be sure..).

They usually go like this – directors put company into administration, creditors get fucked over, company restarts without creditors’ debt and the original controlling interest just rolls on in charge, with mountains of bad karma to work though.

This only works because the controlling interests get to “manage” the administration process, either formally (though a security interest), or informally through a beer agreement with the administrators (who may, or may not be, old schoolmates).

Here’s a proposed solution. In the instance that the business is “sold” in administration and continues to operate (no matter who the new owners are), then all the former creditors receive SAFE notes in the new company equivalent to their outstanding debt.

SAFE notes aren’t held as a liability on the balance sheet, so they don’t influence the calculation of solvency. On the balance sheet they are “other equity” and are automatically converted to shares in a next round of funding (with a discount if added to the SAFE note), if there is one. If there is no funding event and alternatively there is a dissolution event (administration) or a liquidity event (exit), then they can be converted to shares or cash ahead of the event, at the holder’s desire.

In one case they get their money back (more or less), and in the other, they optimise their position for claiming tax losses as they prefer (income or capital loss, for example). When they receive their SAFE notes they get to issue them in the name of any person or entity they wish – again to optimise their tax options.

Seems like a fair and reasonable alternative to the dreaded “Administration Phoenix” that screws over the creditors. The very existence of this scheme would prevent the directors even considering such a miserable option.

Until the SAFE note is converted or otherwise settled by negotiation, the company can’t pay dividends or directors loans etc. in fact you could go the whole hog and give the SAFE note holders control of critical business matters, as if they were investors in liquidated prefs.