Safe And iSafe: Why Startup India Needed A Different Kind Of "Simple" Agreement

(A) Introduction

Founders raising seed capital have increasingly reached for the Simple Agreement for Future Equity (SAFE). Introduced by Y Combinator in 2013, the SAFE was designed to solve a practical problem: how can founders raise early capital without engaging in lengthy negotiations over valuation, investor rights, liquidation preferences, or governance structures?

The answer was elegant. An investor provides capital today in exchange for the right to receive equity at a later date, usually when the company raises a priced financing round. Its promise was attractive because no interest, no maturity date, no immediate valuation negotiation just a promise of future equity once a priced round arrives.  

In the United States, the SAFE quickly became the default instrument for seed-stage fundraising. In India, however, the same simplicity proved difficult to replicate. This obstacle was not commercial practicality but regulatory architecture. Indian company law, securities regulation, and foreign exchange controls are built around clearly recognised categories of financial instruments. A contractual promise of future equity does not fit comfortably within that framework.

The result was the emergence of the iSAFE (India Simple Agreement for Future Equity), introduced by early-stage investment firm 100X.VC in 2019. Understanding why iSAFE looks nothing like its American namesake despite sharing its name is essential for founders, in-house counsel, and investors structuring early-stage rounds in India.

(B) The US SAFE: A Contractual Instrument

The original YC SAFE is intentionally straightforward. Rather than issuing shares or debt instruments at the time funds are invested, a company enters into a contract under which the investor acquires a future right to receive equity upon the occurrence of specified trigger events.

These trigger events commonly include:

• A priced equity financing round;
• A liquidity event such as an acquisition or merger; or
• Certain dissolution events.

The principal commercial protections negotiated between founders and investors are usually limited to:

• A valuation cap;
• A conversion discount; or
• A combination of both.

Importantly, the SAFE is not required to fit within a predetermined statutory category of security at the time of issuance. It operates as a contractual arrangement whose economic outcome is deferred until a subsequent financing event occurs.

This flexibility is one of the principal reasons for its success in the United States.

(C) Why That Structure Fails Under Indian Law

The very feature that makes a SAFE attractive, namely its existence outside conventional categories of debt and equity, creates difficulties within the Indian regulatory framework. The SAFE cannot be implemented in India in its original form for several reasons:

• Absence of a recognised statutory classification:
  Indian corporate and securities law operates within a structured framework of recognised instruments. Equity shares, preference shares, debentures, and other securities derive their validity from statutory recognition. A conventional SAFE does not fit neatly within the categories of securities and financing instruments recognised under Indian company law.
  Also, unlike instruments specifically recognised under Indian law, a plain SAFE relies on a future financing event to determine when and on what basis the investor receives equity, without an equivalent statutory conversion framework.
• Private Placement Requirements
  Section 42 of the Companies Act, 2013 regulates private placements. Where a company receives consideration towards the subscription of securities, allotment must generally occur within sixty days of receipt of funds. Failure to allot securities within the prescribed period triggers an obligation to refund the money within the statutory timeline.
  Because a SAFE contemplates the issue of equity only upon a future financing event, which may occur years later, it sits uneasily with this framework.
• Risk of re-characterisation as a deposit:
  Where funds are received by a company against a contractual promise of future equity without the immediate issue of a recognised security, there is a risk that the amount may fall within the deposit framework under Section 73 of the Companies Act, 2013 read with the Companies (Acceptance of Deposits) Rules, 2014, particularly where the statutory conditions applicable to subscription or application money are not satisfied. The Deposit Rules specifically provide that certain amounts received towards subscription to securities may be treated as deposits if the securities are not allotted within the prescribed period and the amount is not refunded within the prescribed time.
• Additional FEMA concerns:
  Where the investor is non-resident, the SAFE must also satisfy the FEMA framework governing permitted investment instruments, pricing and reporting. A contractual instrument that does not fall within a recognised FEMA category creates an additional layer of regulatory uncertainty.

(D) The Emergence of the iSAFE

Recognising these constraints, 100X.VC introduced the iSAFE in 2019. The innovation was not the creation of a new legal instrument. Rather, it was the adaptation of SAFE economics into a regulatory form already recognised under Indian law.  

An iSAFE is typically structured through the issuance of Compulsorily Convertible Preference Shares (CCPS).

Under this model:

• The investor subscribes to CCPS at the outset.
• The company allots securities immediately upon receipt of funds.
• The CCPS compulsorily convert into equity upon the occurrence of specified trigger events.

The economic outcome resembles a SAFE. The legal structure does not. This distinction is crucial. The iSAFE functions because it is built upon an established statutory foundation rather than an unclassified contractual promise.

As the CCPS is a category the Companies Act, 2013 already recognises, an iSAFE issuance can be executed under Sections 42 (private placement), 55 (issue and redemption of preference shares), and 62 (further issue of share capital), read with the Companies (Share Capital and Debentures) Rules, 2014 and the Companies (Prospectus and Allotment of Securities) Rules, 2014.  

An iSAFE is not, strictly speaking, a SAFE at all. It is a preference share subscription agreement engineered to replicate SAFE-like commercial terms speed, minimal negotiation, deferred valuation while staying inside a statutorily defined instrument.

(E) The Legal Framework Supporting iSAFE

The issuance of iSAFE instruments is generally supported by existing provisions of the Companies Act, 2013, including:  

• Section 42 (Private Placement);
• Section 55 (Issue and Redemption of Preference Shares); and
• Section 62 (Further Issue of Share Capital).

The relevant procedural requirements are supplemented by:

• The Companies (Share Capital and Debentures) Rules, 2014; and
• The Companies (Prospectus and Allotment of Securities) Rules, 2014.

Because CCPS are recognised securities, regulatory uncertainty surrounding allotment and classification is substantially reduced. However, this structure comes with important consequences.  

Where the investor is non-resident, the iSAFE remains subject to FEMA pricing and reporting norms; because CCPS are a recognised capital instrument under the FEMA (Non-Debt Instruments) Rules, 2019, this compliance path is more predictable than for a plain contractual SAFE.  

One practical consequence follows directly from this structure: because iSAFE issuances are share allotments, they are only available to companies not to LLPs or partnership firms, which cannot issue preference shares at all.

(F) Commercial Terms Founders Should Understand

Like a traditional SAFE, an iSAFE seeks to postpone detailed valuation negotiations until a later financing round. The conversion economics usually take one of three forms:

• Valuation cap only: The investor converts at a predetermined maximum valuation, regardless of the valuation achieved in the next funding round. This generally favours the investor because it protects against substantial increases in company value.
• Discount only, no cap: The investor converts at a percentage discount to whatever price the next round sets, with no ceiling generally more founder-friendly, since there's no fixed cap suppressing future upside. The investor converts at a discount to the price paid by new investors in the subsequent financing round. Unlike a valuation cap, there is no fixed ceiling on valuation growth. This structure is often more founder friendly.
• Cap and discount combination: Many iSAFEs provide both protections and allow the investor to convert using whichever method produces the more favourable outcome.

(G) Commercial Mechanics: Cap, Discount and MFN

The Importance of MFN Clauses 

A recurring feature of iSAFE documentation is the Most Favoured Nation (MFN) provision. An MFN clause generally permits an investor to elect more favourable terms subsequently granted to other convertible investors.  

While commercially understandable, founders should approach these provisions with caution. In bridge rounds involving multiple iSAFE issuances, a low valuation cap agreed with one investor may effectively cascade across the entire investor base through MFN elections, significantly affecting dilution outcomes.

(H) Conversion and Maturity Considerations  

Conversion ordinarily occurs on:

• A qualified financing round;
• A liquidity event;
• An acquisition or merger; or
• A prescribed long-stop date.

Unlike a purely contractual SAFE, however, the iSAFE inherits statutory limitations applicable to preference shares.  

Under the Companies Act, 2013, preference shares generally cannot have a tenure exceeding twenty years, subject to limited exceptions.  

Although seed-stage instruments ordinarily convert well before this threshold becomes relevant, the statutory ceiling highlights an important conceptual difference between a contractual promise and a recognised security.

(I) Accounting Consequences  

Another distinction concerns financial reporting. A SAFE in the United States is frequently perceived as sitting outside traditional debt accounting treatment until conversion.  

The iSAFE produces a different outcome. Because the instrument is structured as CCPS, the investment ordinarily forms part of the company's capital structure and is reflected within shareholders' funds rather than appearing as a conventional liability.  

Founders should appreciate the impact this may have on cap table presentation, investor reporting, and future fundraising discussions.

(J) Practical Takeaways for Founders and Investors

• Don't assume portability. Founders who have seen a YC SAFE used abroad should not attempt to execute that exact template in India. It creates real enforceability risk and FEMA-compliance gaps for foreign investment.
• Treat iSAFE as a share issuance, not a side letter. Because it involves allotment of CCPS, standard company law formalities, board resolutions, private placement offer letters, filing requirements apply in a way a US SAFE's proponents never had to contemplate.
• Negotiate the cap/discount structure deliberately. The choice between cap-only, discount-only, and combined structures has real economic consequences across multiple bridge investors, particularly where MFN clauses are in play.
• Coordinate with company secretarial compliance early. Because iSAFE issuances trigger Companies Act filing obligations, founders should loop in company secretarial support at term sheet stage, not after signing.
• Watch valuation and pricing norms for foreign investors. Where the investor is a non-resident, FEMA pricing guidelines applicable to preference share issuances continue to apply, unlike a contractual SAFE which sat outside that framework entirely.

(K) Conclusion

The journey from SAFE to iSAFE illustrates a broader lesson about legal transplantation. Financing instruments do not travel across jurisdictions unchanged. Their success depends on compatibility with the local regulatory ecosystem.

The American SAFE derives its strength from contractual flexibility and regulatory minimalism. Indian law, by contrast, requires financing instruments to operate within well-defined statutory categories. The iSAFE therefore accomplishes the same commercial objective through a fundamentally different legal route by embedding SAFE economics within compulsorily convertible preference shares.

For founders and investors, the key takeaway is straightforward: the SAFE and the iSAFE may share a name and a commercial purpose, but they are not the same instrument. Treating them as interchangeable can create significant legal, regulatory, and compliance risks. Understanding the distinction at the outset is far less expensive than discovering it during the next financing round.

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