iSAFE – India Simple Agreement for Future Equity

Summary: The content explains that the India Simple Agreement for Future Equity (iSAFE), conceived by 100X.VC in July 2019, is an adaptation of Y Combinator’s SAFE structured as Compulsorily Convertible Preference Shares (CCPS) to align with Indian company law. It states that iSAFE is designed to address early-stage startups’ challenges in determining valuations and negotiating extensive shareholders’ agreements by using a short-form, template-driven agreement with deferred pricing and mandatory conversion into equity on specified trigger events or within three years. The article outlines its legal structure, investment process, conversion mechanism, founder benefits, investor protections, and compliance requirements under the Companies Act, 2013 and, where applicable, the FEMA framework. It also describes features such as liquidation preference, pari passu ranking among successive iSAFE investors, treatment as CCPS in financial statements, and the need for corporate approvals, statutory filings, and regulatory compliance. The article concludes that iSAFE is intended to facilitate founder-friendly early-stage fundraising while operating within the existing legal framework governing CCPS issuances.

iSAFE – India Simple Agreement for Future Equity
The CCPS Route for Founder-Friendly Early-Stage Fund Raising in India

1. Background

Early-stage Indian startups – typically at the idea, MVP (Minimum Viable Product), or very-early-revenue stage – have historically struggled with two related problems when raising their first cheque: (a) arriving at a defensible valuation at a point where there is little operating history to value, and (b) negotiating heavily one-sided shareholders’ agreements imposed by angel networks and VCs, which consume time, legal cost, and founder bandwidth at the very moment speed of closing matters most.

The India SAFE Note (“iSAFE”) was conceived by 100X.VC in July 2019 as an adaptation of Y Combinator’s SAFE (Simple Agreement for Future Equity) instrument, modified to work within the framework of Indian company law. Since Indian law does not recognise a pure contractual “right to future equity” instrument outside the share capital structure, the iSAFE is legally issued as Compulsorily Convertible Preference Shares (CCPS) – giving investors an instrument with the commercial simplicity of a SAFE, wrapped in a security recognised under the Companies Act, 2013.

2. Legal Character – Why CCPS, and Not a Pure Contractual SAFE

Unlike the US SAFE (a bare contract creating a right to shares in the future, with no immediate issuance of any security), Indian law requires that any instrument through which a company raises share capital be issued as a recognised class of security under Section 42/62 read with Section 43 of the Companies Act, 2013 and the Companies (Share Capital and Debentures) Rules, 2014. A CCPS satisfies this requirement while still permitting the parties to defer the equity conversion price to a future date/event – replicating the deferred-pricing mechanic of a SAFE.

• Not a debt instrument: the iSAFE/CCPS does not carry a repayment obligation or fixed coupon in the manner of a debenture or loan; it is a share capital instrument from inception.
• Compulsory conversion: conversion into equity is mandatory, not optional, distinguishing it from ordinary (non-convertible or optionally convertible) preference shares.
• Cap table treatment: the outstanding note is carried on the company’s capitalisation table as a convertible security, similar to a warrant or option, until conversion.

3. Key Structural Features

4. How the Investment Is Made – Process Flow

• Commercial agreement on investment amount and choice of variant – plain, valuation cap, discount, valuation cap with discount, or Most Favoured Nation (MFN) – between the startup and the investor.
• Execution of the iSAFE agreement (short-form template) by both parties.
• Completion of applicable corporate and secretarial formalities – board approval, private placement (Section 42) or preferential allotment (Section 62(1)(c)) compliance as applicable, offer letter in Form PAS-4, valuation report where required, and passing of the special/board resolution.
• Receipt of funds by the startup and allotment of CCPS to the investor; filing of Form PAS-3 (return of allotment) with the Registrar of Companies within the prescribed timeline.
• Entry of the CCPS holding in the company’s register of members and reflection on the capitalisation table as an outstanding convertible security.
• Automatic conversion into equity shares on the earlier of the specified trigger events or expiry of three years, followed by consequent ROC filings (e.g., allotment of converted equity shares, updated capital structure disclosures).

5. Benefits to the Startup

• No premature valuation: founders are not forced to negotiate a pre-money/post-money valuation at a stage (idea, MVP, or very early revenue) where any number is likely to be arbitrary and value-destructive if set too low.
• Speed of closing: a short, standardised, template-driven agreement (about six pages) can be negotiated and signed quickly, which matters when runway is short and timing of funds is critical.
• Lower legal cost: the template nature of the instrument reduces the need for extensive bespoke legal drafting and negotiation of a full Shareholders’ Agreement at the first-cheque stage.
• Founder-favourable terms: compared to the typically one-sided agreements used by angel networks/VCs at seed stage, the iSAFE is designed to be balanced in favour of the entrepreneur.
• Ability to raise sequentially: startups can issue successive iSAFE rounds to new investors (ranking pari passu with earlier iSAFE holders) as they build traction, deferring the priced round until the business can command a fair, and usually higher, valuation.
• Clean, predictable conversion mechanics: conversion is automatic and time-bound (capped at three years), which avoids the note lingering indefinitely on the cap table and gives both sides certainty on the outer limit for conversion.

6. Corresponding Investor Protections

While the instrument is designed to be founder-friendly, it retains protections that make it commercially acceptable to investors: iSAFE holders receive liquidation preference over founders/equity shareholders to the extent of invested capital, rank pari passu with subsequent iSAFE investors (no round is structurally subordinated to another), and are assured of conversion into equity within a defined three-year outer limit even if no priced round or exit event occurs earlier.

7. Practitioner’s Compliance Checkpoints

Since the iSAFE is issued as CCPS, it attracts the ordinary Companies Act, 2013 framework applicable to issuance of preference shares, and – where the investor is a person resident outside India – the FEMA/FDI framework applicable to CCPS as an eligible instrument for foreign investment. Points meriting particular attention include:

• Mode of issuance: private placement under Section 42 (with PAS-4 offer letter, separate bank account, and PAS-3 filing) or preferential allotment under Section 62(1)(c), as the facts warrant.
• Authorised capital and MOA/AOA: confirming that the authorised share capital and the Articles permit issuance of the relevant class/series of CCPS, and effecting alteration where required.
• Terms of issue: the CCPS terms (coupon, if any, conversion formula, conversion triggers, liquidation preference, pari passu ranking across tranches) must be built into the resolution and share

certificate/terms sheet, since the “iSAFE” label itself has no statutory meaning – the enforceable terms are whatever is stated in the CCPS terms of issue.

• FEMA angle for foreign investors: CCPS is a recognised capital instrument under the FEMA (Non-Debt Instruments) Rules; pricing guidelines, reporting in Form FC-GPR, and sectoral cap/entry-route conditions apply where the investor is not resident in India.
• Valuation report: a valuation report from a registered valuer is ordinarily required for preferential issuance of shares (including CCPS) to persons other than existing shareholders in the same proportion, subject to applicable exemptions.
• ROC filings on conversion: on conversion into equity shares, consequential filings (e.g., updated MGT-7/MGT-7A capital structure disclosures, register of members update) should be tracked against the three-year outer limit or the earlier trigger event.

8. Frequently Asked Questions

What is an iSAFE Note?

iSAFE stands for India Simple Agreement for Future Equity. It represents a cash investment made in exchange for a convertible instrument. It is not a debt instrument. To remain compliant with Indian company law, an iSAFE note is structured as Compulsorily Convertible Preference Shares (CCPS), convertible upon the occurrence of specified events.

How does an investment in iSAFE happen?

The investor and the startup agree on the investment amount and sign an iSAFE agreement. The investor remits the amount once the applicable legal and secretarial formalities are completed. The outstanding iSAFE note is reflected on the company’s cap table like any other convertible security (e.g., a warrant or option).

To whom does the startup issue iSAFE notes?

iSAFE notes are issued by the startup in favour of the investors, i.e., the iSAFE note holders.

What are the benefits to the startup of taking its FIRST investment via an iSAFE note?

No valuation needs to be fixed at a stage (idea/MVP/early revenue) where a fair valuation is genuinely difficult to arrive at. The instrument also avoids lengthy, one-sided shareholders’ agreements in favour of a short, template-driven, founder-friendly document, enabling quicker closure of the funding round.

When do iSAFE notes convert into equity shares?

Conversion is automatic on the occurrence of specified liquidity events (the next pricing/valuation round, dissolution, merger/acquisition, etc.), or at the end of three years from the date of issue – whichever occurs earlier.

Do iSAFE note holders have a liquidation preference over equity holders/promoters/founders?

Yes. iSAFE note holders have liquidation preference, to the extent of their invested capital, ahead of founders/equity shareholders.

Do the FIRST iSAFE note holders rank ahead of subsequent iSAFE note holders?

No. First iSAFE note holders rank pari passu with subsequent iSAFE note holders/investors.

Can a startup issue iSAFE notes to subsequent investors?

Yes, and it is generally advisable. Successive iSAFE rounds allow the startup to demonstrate traction, so that the eventual priced round – where pre- and post-money valuation is negotiated – reflects a fair, and typically higher, valuation.

How is the iSAFE note reflected in the company’s financials, and does authorised/paid-up capital increase?

The investment is reflected as CCPS in the financial statements. Yes – the authorised and paid-up share capital must be increased to the extent of the investment received under the iSAFE note.

9. Concluding Remarks

The iSAFE is best understood not as a new species of security, but as a market-standard CCPS term sheet built for speed and founder-friendliness at the first institutional cheque. For startups, it removes the valuation and negotiation friction that typically slows down seed rounds. For investors, the liquidation preference, pari passu ranking, and time-bound conversion preserve the commercial protections expected of a preference-share instrument. As with any CCPS issuance, the statutory formalities under the Companies Act, 2013 – and, where applicable, FEMA – continue to apply in full, and should be built into the transaction timeline from the term-sheet stage itself rather than treated as a post-facto formality.

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Disclaimer: This note is intended for general informational purposes and professional circulation only, and does not constitute legal, tax, or investment advice. It is based on publicly available material published by 100X.VC. Parties should obtain specific advice, and review the executed iSAFE/CCPS terms of issue, before relying on any of the above in relation to a particular transaction.

 Author: CS Ronak Jhuthawat | Company Secretary | Partner, Ronak Jhuthawat & Co. | compliancerjac@gmail.com  | Mobile, 9887422212