iSAFE Notes in India: Meaning, Conversion and Legal Compliance

iSAFE Notes in India: Meaning, Conversion and Legal Compliance. Early-stage startups frequently require funding before they have sufficient financial history, revenue or market data to support a reliable valuation. Negotiating the valuation of such a startup may take considerable time and can delay the fundraising process. To address this difficulty, investors and founders often use instruments that allow investment to be made immediately while postponing the determination of the final equity price until a future funding round. One such instrument is the iSAFE, commonly expanded as the India Simple Agreement for Future Equity.
It allows an investor to provide capital to an Indian startup at an early stage and receive equity shares upon the occurrence of a specified future event, generally at a valuation cap, discount or other pre-agreed conversion formula. The iSAFE model was introduced and popularised in India by 100X.VC in July 2019. Its model documentation includes valuation-cap, discount, valuation-cap-plus-discount and most-favoured-nation structures. However, the term “iSAFE” is a commercial or market expression and is not separately defined as a security under the Companies Act, 2013. Its legal treatment therefore depends on the instrument actually issued and the terms contained in the investment documents.
Meaning of an iSAFE Note
An iSAFE is an early-stage fundraising arrangement under which an investor contributes money to a startup in return for the right to receive equity shares in the future. The investor does not necessarily receive ordinary equity shares at the time of making the investment. The number and price of the equity shares are determined later when a defined conversion event takes place.
The conversion event may be a subsequent priced equity round, merger, acquisition, company sale, dissolution or expiry of a specified long-stop period. The exact event depends entirely on the wording of the iSAFE agreement and the terms of the underlying security. An iSAFE allows founders and investors to avoid fixing the company’s final valuation at the seed or pre-seed stage. Instead, the startup’s valuation is determined during a later institutional round when more commercial information may be available.
Is an iSAFE Really a “Note”?
The expression “iSAFE note” is commonly used in the startup ecosystem, but it can be legally misleading. A conventional note generally represents a debt obligation that may carry interest, have a maturity date and require repayment. An iSAFE may be designed as a non-debt investment instrument. Where it is structured through compulsorily convertible preference shares, the company issues a recognised security at the time of investment, and those preference shares later convert into equity shares.
This must not be confused with a statutory convertible note issued by a DPIIT-recognised startup. Under the recognised startup framework, a convertible note represents money initially received as debt, which may either be repaid or converted into equity. A DPIIT-recognised startup can receive Rs.25 lakh or more in a single tranche from a person through such a convertible note, and the instrument must be converted or repaid within a maximum period of 10 years. Therefore, the words “iSAFE”, “SAFE”, “convertible note” and “CCPS” should not be used interchangeably without examining the actual legal documents.
Legal Character of an iSAFE in India
The Companies Act, 2013 does not contain a separate category of security called an iSAFE. For this reason, simply signing a contract titled “iSAFE Agreement” does not automatically establish how the investment will be treated under Indian company law. In practice, an iSAFE transaction may be implemented by issuing Compulsorily Convertible Preference Shares, commonly known as CCPS. The investor receives CCPS at the time of investment, and the CCPS convert into equity shares when the agreed event occurs.
The CCPS structure provides the investment with an identifiable legal form under the Companies Act. Preference shares are governed by Section 55, while their issue through a preferential or private placement route may also attract Section 42, Section 62 and the applicable rules. A purely contractual promise to issue equity in the future may create uncertainty regarding its classification, deposit treatment, enforceability, accounting treatment and FEMA eligibility. Startups should therefore avoid blindly adopting a foreign SAFE template without adapting it to Indian law.
How an iSAFE Transaction Works
At the beginning of the transaction, the startup and investor agree on the investment amount and the commercial terms governing future conversion. These terms usually include a valuation cap, conversion discount, qualifying financing threshold, liquidity-event treatment and conversion timeline. The company then completes the applicable corporate approvals and security-allotment process. Where the instrument is structured as CCPS, the investor is allotted preference shares against the investment amount.
The startup uses the investment for its business operations. The investor generally waits until a defined conversion event occurs. Upon the occurrence of that event, the conversion formula is applied and the investor receives equity shares. The investor may receive more shares than an investor participating directly in the future round because the iSAFE investor accepted the higher risk of investing at an earlier stage.
Main Types of iSAFE Instruments
Valuation Cap iSAFE
A valuation-cap iSAFE specifies the maximum company valuation that will be used to calculate the investor’s conversion price. If the valuation in the next funding round is higher than the agreed cap, the iSAFE investor converts at the lower capped valuation. For example, an investor may invest when no final valuation is agreed, subject to a valuation cap of Rs.12 crore.
If the next priced round values the company at Rs.20 crore, the iSAFE investor may convert using the Rs.12 crore cap, subject to the agreed formula. A valuation cap does not necessarily mean that the company is presently valued at the capped amount. It is primarily a mechanism for calculating the conversion price and rewarding the investor for investing early.
Discount iSAFE
A discount iSAFE allows the investor to convert at a specified discount to the price paid by investors in the next qualified financing round. For example, where the next-round investors purchase equity shares at Rs.100 per share and the iSAFE provides a 20% discount, the iSAFE conversion price may be Rs.80 per share.
The discount applies to the future conversion price. It should not be confused with issuing shares below their face value or issuing securities in violation of Section 53 of the Companies Act. Section 53 generally prohibits a company from issuing shares at a discount except in limited statutory cases.
Valuation Cap and Discount iSAFE
This structure provides both a valuation cap and a conversion discount. The agreement normally specifies that the investor will receive the benefit of whichever mechanism produces the lower conversion price.
For instance, if the discounted price is Rs.80 per share but the valuation-cap formula gives a price of Rs.60 per share, the investor may convert at Rs.60 per share. The documents must clearly state whether the investor receives the lower of the two prices or whether another method applies. Ambiguous drafting can result in significant disputes at the time of conversion.
Most-Favoured-Nation iSAFE
A Most-Favoured-Nation, or MFN, iSAFE allows an early investor to adopt more favourable terms offered by the company to a subsequent iSAFE investor. For example, if the first investor signs an iSAFE without a valuation cap and the company later issues another iSAFE with a favourable cap, the first investor may be entitled to adopt the better term, depending on the MFN clause.
The company should define the scope of the MFN protection carefully. It should clarify whether the right applies to economic terms alone or also covers governance, information and liquidity rights. The four commonly published iSAFE model structures include valuation-cap, discount, cap-plus-discount and MFN variants.
Important Commercial Terms in an iSAFE
Investment Amount: The agreement should clearly record the total amount being invested and the account into which the money will be transferred. The amount should match the offer documents, valuation report, board approval, shareholder approval and return of allotment.
Valuation Cap: The valuation cap determines the maximum valuation used for calculating the conversion price. The agreement must clarify whether the cap is calculated on a pre-money or post-money basis. The definition of company capitalisation is equally important. It should specify whether founder shares, employee stock options, unallocated ESOP pools, warrants and other convertible securities are included in the denominator.
Conversion Discount: The discount gives the iSAFE investor a lower price than the price paid by future-round investors. The agreement should specify the percentage and identify the class of securities whose price will be used for comparison.
Qualified Financing: The agreement should define the minimum amount that must be raised in the future round for automatic conversion to take place. A small bridge investment should not unintentionally trigger conversion unless that is what the parties intended.
Long-Stop or Conversion Date: An iSAFE should specify what happens if the company does not complete a qualified financing within the agreed period. Model documents may provide for conversion upon a financing, liquidity event, dissolution or expiry of a specified period, but the actual agreement remains controlling.
Liquidity Event: A liquidity event may include a merger, acquisition, sale of substantial assets, change in control, share sale or initial public offering. The agreement should explain whether the investor receives equity conversion, repayment, a multiple of the investment or another amount upon such an event.
Liquidation Preference: Where the instrument is structured as preference shares, the terms may provide priority over equity shareholders in relation to the return of capital upon liquidation or another specified event. Liquidation preference is not automatically identical in every iSAFE. The documents should state whether it is participating or non-participating, whether it is capped and how it ranks against other preference shareholders.
Investor Rights: The documents should address whether the investor receives information rights, inspection rights, pro-rata participation rights, transfer restrictions, tag-along rights or other contractual protections before or after conversion. An iSAFE investor may not automatically receive voting rights equivalent to an equity shareholder. The rights depend on the class of security issued, the Articles of Association and the investment documents.
Conversion of an iSAFE into Equity Shares
Conversion is the process through which the investor’s iSAFE-linked security becomes equity share capital. The number of shares issued depends on the investment amount and the conversion price calculated under the agreement.
A simplified calculation is:
Number of equity shares = Investment amount ÷ Applicable conversion price
Where only a discount applies:
Discounted price = Price in the qualified financing × (1 – Discount percentage)
Where a valuation cap applies:
Cap price = Valuation cap ÷ Company capitalisation
Where both a cap and discount apply, the agreement may allow conversion at the lower of the discounted price and the cap price.
Illustrative Conversion Example
Assume that an investor contributes Rs.50 lakh under an iSAFE carrying a valuation cap of Rs.12 crore and a 20% discount.
The startup subsequently raises a qualified financing round at a pre-money valuation of Rs.20 crore. New investors subscribe at Rs.100 per equity share.
Under the discount method, the conversion price would be:
Rs.100 – 20% = Rs.80 per share.
Assume that the valuation-cap formula, after applying the contractually defined fully diluted capitalisation, produces a cap price of Rs.60 per share. Since Rs.60 is lower than Rs.80, the iSAFE investor may convert at Rs.60 per share, provided the agreement gives the benefit of the lower price.
The approximate number of shares would therefore be:
Rs.50,00,000 ÷ Rs.60 = 83,333.33 shares.
The final number will depend on the contractual rounding method, authorised capital, face value, securities premium and the precise capitalisation definition. Fractional shares may need to be rounded or otherwise dealt with under the agreement.
Conversion Events
Qualified Equity Financing
The most common conversion event is a future priced funding round. When the company raises the minimum amount specified in the iSAFE agreement, the instrument automatically converts into equity or the same class of securities issued in that round. The documents should clarify whether the iSAFE converts into ordinary equity shares or a shadow series of preference shares carrying substantially similar economic rights to the new-round securities.
Liquidity Event
If the company is acquired before completing a priced round, the agreement may permit conversion immediately before the transaction or payment of an agreed amount from the sale proceeds. The agreement should clearly identify the priority of the iSAFE investor relative to creditors, preference shareholders, founders and ordinary equity shareholders.
Dissolution or Winding Up
Where the company is dissolved before conversion, the investor may have a contractual or preference-share right to receive the investment amount before distributions are made to equity shareholders. However, payment remains subject to the rights of secured lenders, statutory creditors, employees and other persons having superior legal claims.
Long-Stop Conversion
Some iSAFE documents provide for conversion after a defined period even if no qualified financing has occurred. The conversion may be based on the valuation cap, a fresh valuation or another formula. The company must ensure that such long-stop conversion is consistent with the original terms approved by its shareholders and the valuation method selected under the Companies Act.
Companies Act Compliance for Issuing an iSAFE
Review of the Articles of Association
The company should first examine whether its Articles of Association authorise the issue of preference shares and the proposed rights attached to them. Where the Articles do not contain the required authority, they should be amended before the CCPS are issued. Any investor rights that affect share capital, voting, transfer or liquidation should also be reflected in the Articles where legally necessary.
Availability of Authorised Share Capital
The company must verify whether it has sufficient authorised preference-share capital to issue the CCPS and sufficient equity-share capital to complete future conversion. If the authorised capital is inadequate, the company must increase it and alter its capital clause before allotment or conversion, as applicable. Planning only for the initial CCPS allotment and ignoring the equity shares required on conversion is a common startup compliance error.
Valuation by a Registered Valuer
A preferential issue under Section 62(1)(c) must generally be supported by a valuation report from a registered valuer. Rule 13 requires the issue price of shares and other convertible securities to be determined based on such valuation, and the issue price cannot be lower than the valuer-determined price. For convertible securities, the company may determine the price of the resulting shares either at the time of issuing the convertible instrument or closer to the conversion date. The selected approach should be disclosed and approved at the initial offer stage. The valuation report should be aligned with the conversion formula. A valuation cap or discount written into the agreement cannot override the statutory valuation requirements.
Board Approval
The Board of Directors should consider and approve the proposed fundraising, draft offer documents, valuation report, iSAFE or subscription agreement, terms of CCPS, notice of the shareholders’ meeting and identified investors. The board documents should clearly state the investment amount, number of securities, issue price, conversion terms, rights attached to the instrument and proposed use of funds.
Shareholders’ Special Resolution
A preferential issue to identified investors generally requires approval through a special resolution under Section 62(1)(c), read with the applicable rules. The explanatory statement must contain the prescribed disclosures, including the object of the issue, number of securities, price, valuation basis, proposed allottees, change in control and other material terms. The resolution and the terms should be broad enough to cover the complete conversion mechanism. Any later material change may require fresh corporate approvals.
Private Placement Compliance
Where the investment is raised through private placement, Section 42 and Rule 14 become applicable. The offer must be made only to specifically identified persons and cannot be advertised or offered to the public. The number of persons to whom private placement offers may be made is generally restricted to 200 persons in aggregate during a financial year for each kind of security, excluding qualified institutional buyers and employees receiving securities under an employee stock option scheme.
The company should issue the prescribed private placement offer-cum-application letter in Form PAS-4 and maintain the private placement record in Form PAS-5. The forms and supporting documents should be consistent with the iSAFE agreement.
Receipt of Investment Funds
Subscription money must be received through banking channels from the bank account of the identified investor. Cash collection is not permitted for a private placement. The company should maintain the money in the prescribed bank account and should not utilise it before allotment has been completed and the return of allotment has been filed.
The remitter’s name, bank account and amount should match the offer and allotment records. Payments from unrelated third parties can result in compliance and beneficial-ownership concerns.
Allotment Within the Prescribed Period
Under Section 42, the company must allot the securities within 60 days from the date on which the application money is received. If the company cannot complete the allotment within that period, it must refund the money within the following 15 days. A failure to refund within that time attracts interest at 12% per annum from the end of the sixtieth day. The company should therefore complete the valuation, approvals and documentation before receiving funds wherever possible.
Filing of Return of Allotment
After allotment, the company must file the prescribed return of allotment in Form PAS-3 with the Registrar of Companies within 15 days. The filing must contain the allottee details and prescribed attachments. Until the return of allotment is filed, private placement funds should not be used in violation of Section 42. The company must also update its statutory registers, capitalisation table and beneficial-ownership records and complete share-certificate or dematerialisation formalities, as applicable.
Preference-Share Requirements
Where iSAFE is implemented through CCPS, Section 55 and the Companies (Share Capital and Debentures) Rules must be followed. The Articles must authorise the issue, shareholders must approve the terms, and the company should not have subsisting defaults in the redemption of preference shares or payment of preference dividends where the applicable rule restricts further issues.
Indian company law does not permit irredeemable preference shares. Preference shares generally cannot have a tenure exceeding 20 years, except for the specific infrastructure-project frame. A compulsorily convertible structure should therefore prescribe a clear conversion period within the permitted legal tenure.
Legal Compliance at the Time of Conversion
The occurrence of a conversion trigger should be formally documented. The company should determine the qualified financing price, discount price, cap price and final conversion ratio in accordance with the approved documents. The Board should record the conversion, approve the allotment of resultant equity shares and confirm that sufficient authorised equity capital is available. Where the selected valuation approach requires valuation near the conversion date, the company should obtain a fresh registered-valuer report within the applicable statutory timeframe.
The company should file the relevant return of allotment, update the register of members, cancel or convert the CCPS records, complete the required depository or certificate process and update its capitalisation table. The terms recorded in the original special resolution, offer letter, Articles and investment agreement should be compared before conversion. A conversion formula that materially differs from the approved terms may require fresh shareholder approval.
Section 53 and Conversion Discount
The “discount” provided under an iSAFE generally refers to a discount against the future financing-round price. It does not mean that the company is permitted to issue shares below their face value.
Section 53 prohibits the issue of shares at a discount except in specifically permitted cases. In addition, the preferential issue price must comply with the registered-valuer requirement under Rule 13. Accordingly, the contractual discount and valuation cap should be drafted so that the final conversion price remains legally permissible.
FEMA Compliance for Foreign Investors
An iSAFE investment by a person resident outside India requires additional scrutiny under the Foreign Exchange Management Act, the Non-Debt Instruments Rules and RBI directions. For foreign-investment purposes, fully paid and fully and mandatorily convertible preference shares are treated as equity instruments. Optionally or partially convertible preference shares are generally treated as debt instruments and may fall outside the ordinary FDI charter. The conversion price or conversion formula must be determined upfront when the convertible instrument is issued. The price on conversion cannot be lower than the fair value calculated at the time of issuance under the applicable FEMA pricing rules.
The investment must also comply with the applicable entry route, sectoral cap, investment limits, beneficial-ownership restrictions and sector-specific conditions. An optionality or exit provision cannot guarantee the foreign investor an assured return or a predetermined exit price. The company must receive the funds through a permitted banking channel, complete KYC and banking documentation and make the applicable foreign-investment filing, including Form FC-GPR where prescribed.
A foreign investor should not invest under a generic contract merely labelled as an iSAFE unless the instrument qualifies under FEMA. Where a statutory convertible note is used instead, the issuing company must be an eligible Indian startup, the investment must be at least ?25 lakh in a single tranche, and conversion or repayment must occur within 10 years.
Tax Treatment of iSAFE Investments
Tax at the Time of Investment
The tax treatment depends on the legal form of the instrument. Where the company issues CCPS, the amount is generally recorded as share capital and securities premium based on the terms of issue. The former angel-tax provision under Section 56(2)(viib) is not applicable from Assessment Year 2025-26.
However, its removal does not eliminate every tax issue connected with startup securities. Transactions involving inadequate consideration, related parties, non-residents or unusual valuation terms should still be examined under the remaining provisions of the income provisionarch2?turn785540search16?
Tax at the Time of Conversion
Section 47(xb) provides that conversion of preference shares into equity shares of the same company is not regarded as a transfer for capital-gains purposes. Therefore, where the iSAFE is properly structured as preference shares, conversion into equity shares should generally not create an immediate capital-gains liaearch0?turn785540search3?
The cost of the preference shares is carried over as the cost of the equity shares received on conversion. For calculating the holding period of the resultant equity shares, the period during which the preference shares werearch4?turn785540search7?
Tax on Subsequent Sale
When the investor later sells the equity shares, capital gains are calculated using the applicable sale consideration, carried-forward cost and holding period. The applicable tax rate will depend on whether the shares are listed or unlisted, the investor’s residential status, the period of holding and the law applicable in the year of sale. For foreign investors, tax-treaty eligibility, withholding obligations and repatriation documentation may also need to be examined.
Accounting Treatment of iSAFE
The accounting classification should be determined from the substance of the instrument and not merely from the title “iSAFE”. Where the company has legally issued CCPS, the accounting team should examine the conversion obligation, redemption terms, dividend rights, settlement alternatives and other contractual conditions under the accounting standards applicable to the company.
An instrument may be classified as equity, a financial liability or a compound financial instrument depending on its terms and the applicable accounting outline. The company should obtain its auditor’s view before finalising the documentation. The accounting treatment in the books of the investor may also differ depending on whether the investor applies Accounting Standards, Ind AS or another regulatory framework.
Stamp Duty and Dematerialisation
The company should examine the stamp-duty requirements applicable to the issue of CCPS, execution of investment documents and issuance of resultant equity shares. Stamp-duty treatment may depend on the nature of the document, place of execution, state amendments and whether the securities are issued in physical or dematerialised form.
The company must also review whether the mandatory dematerialisation provisions applicable to unlisted companies cover it. Where dematerialisation is required, the ISIN and depository arrangements should be completed before the allotment or transfer of securities.
Advantages of iSAFE Funding
An iSAFE may help a startup complete an early-stage fundraising transaction without immediately negotiating every aspect of a priced equity round. This may reduce commercial negotiation and allow the company to receive growth capital more quickly.
It postpones the final valuation discussion until the company has more operational data, customers, revenue or institutional investor interest. For investors, the valuation cap or discount provides compensation for accepting early-stage risk. The investor may receive a larger number of shares than investors entering during the future priced round. An iSAFE can also reduce the immediate cap-table negotiation between founders and investors, although the economic dilution remains and becomes visible upon conversion.
Risks for Founders
Founders may underestimate the dilution arising from multiple iSAFE instruments. Each investment may appear small when signed, but the combined conversion effect can substantially reduce promoter ownership during the next funding round. A valuation cap that is too low can result in significant dilution. A post-money cap can create a different ownership outcome from a pre-money cap, particularly where several instruments are outstanding.
MFN provisions can allow earlier investors to adopt more favourable terms granted in later transactions, increasing the eventual dilution. Founders must also ensure that the company has sufficient authorised capital, completes private placement filings and correctly records every outstanding convertible instrument in its cap table.
Risks for Investors
An iSAFE investor may not receive immediate equity voting rights. The investor’s protection depends on the rights attached to the CCPS, the Articles and the investment agreement. If the company never completes another financing round, the investor may need to rely on a long-stop conversion, liquidity-event provision or dissolution right.
The investor should verify whether the valuation cap is pre-money or post-money and whether the ESOP pool and outstanding convertibles are included in the capitalisation calculation. An investor should also examine whether the company has completed valid corporate approvals. A signed agreement without proper allotment, valuation and statutory filings may expose the investor to enforceability and regulatory risks.
Important Documents for an iSAFE Transaction
A properly structured transaction may require an iSAFE or investment agreement, CCPS subscription agreement, valuation report, amended Articles of Association, board resolutions, shareholders’ special resolution, explanatory statement, PAS-4 offer letter, PAS-5 record, PAS-3 return of allotment and statutory register entries.
Depending on the transaction, the parties may also require a shareholders’ agreement, disclosure letter, founder undertakings, intellectual-property assignments, employment documents, foreign-investment filings, tax certificates and depository documents. The documents must be read together. The conversion provisions in the investment agreement should not conflict with the Articles, valuation report or shareholder resolution.
Compliance Checklist for Startups
Before raising money, the startup should identify whether the investor is resident or non-resident and decide whether the instrument will be CCPS, CCD, statutory convertible note or another legally recognised security. The company should review its Articles, authorised capital, DPIIT status, sectoral restrictions and existing investment agreements. It should then obtain a valuation report and approve the complete conversion formula.
Before receiving funds, the company should complete the board and shareholder approvals and issue the prescribed private placement documents. Funds must be received from the investor’s bank account through permitted banking channels. After receipt, the company must complete allotment within the statutory period, file PAS-3, update statutory registers and issue the relevant securities in the prescribed form. At conversion, the company should recalculate the conversion ratio, obtain any required fresh valuation, verify authorised equity capital, approve the allotment and complete ROC, FEMA, tax and depository formalities.
Conclusion
An iSAFE can be an effective fundraising instrument for an early-stage Indian startup because it allows the company to obtain capital without immediately completing a fully priced equity round. It also provides early investors with economic protection through a valuation cap, discount or other favourable conversion mechanism. However, an iSAFE is not a substitute for proper legal compliance. The label itself has no independent statutory status under Indian company law. The transaction must be implemented through a legally recognised instrument, commonly CCPS, and must comply with the Companies Act, private placement rules, valuation requirements, FEMA, income-tax provisions and applicable accounting standards.
Founders should carefully model the expected dilution before signing multiple iSAFE agreements. Investors should examine the company’s approvals, valuation, capitalisation definition, conversion formula and rights before transferring funds. Professionally drafted documentation and timely regulatory filings are essential to ensure that the investment converts smoothly during the company’s future funding round.
Frequently Asked Questions
Q1. What is the full form of iSAFE?
Ans. iSAFE generally stands for India Simple Agreement for Future Equity. It is an early-stage fundraising arrangement that allows an investor to provide money now and receive equity shares upon a future conversion event.
Q2. Is an iSAFE recognised under the Companies Act?
Ans. The expression “iSAFE” is not separately defined as a statutory security under the Companies Act. Its legal treatment depends on the actual instrument issued. Many transactions use CCPS to provide the investment with a recognised legal structure.
Q3. Is an iSAFE a loan?
Ans. An iSAFE is not necessarily a loan. When structured through CCPS, it represents an investment in compulsorily convertible preference shares rather than an ordinary repayable loan. However, the documents must be examined to determine its true legal and accounting character.
Q4. Is iSAFE the same as a convertible note?
Ans. No. A statutory convertible note issued by an eligible DPIIT-recognised startup may be converted into equity or repaid within 10 years and is subject to a minimum investment of ?25 lakh in a single tranche. An iSAFE structured through CCPS follows a different legal route.
Q5. Does the investor receive shares immediately?
Ans. Where the transaction is structured through CCPS, the investor receives preference shares at the time of allotment. Ordinary equity shares are received later when the CCPS convert according to the agreed terms.
Q6. What is a valuation cap?
Ans. A valuation cap is the maximum valuation used to calculate the iSAFE investor’s conversion price. If the company’s future financing valuation exceeds the cap, the investor may convert at the lower capped valuation.
Q7. What is a conversion discount?
Ans. A conversion discount allows the iSAFE investor to obtain shares at a price lower than the price paid by investors in the next qualified financing round.
Q8. Can an iSAFE have both a cap and discount?
Ans. Yes. The agreement may provide both. It commonly allows the investor to use whichever method results in the lower conversion price, but the exact rule must be expressly stated.
Q9. Is valuation required for issuing an iSAFE?
Ans. Where convertible securities are issued through a preferential allotment, a registered-valuer report is generally required under the Companies Act framework. Additional valuation requirements apply when the investor is a non-resident.
Q10. Can a foreign investor invest through an iSAFE?
Ans. A foreign investor may invest only through an instrument and process permitted under FEMA. Fully paid and fully and mandatorily convertible preference shares may qualify as equity instruments, subject to pricing, sectoral, entry-route and reporting requirements.

Early-stage startups frequently require funding before they have sufficient financial history, revenue or market data to support a reliable valuation. Negotiating the valuation of such a startup may take considerable time and can delay the fundraising process. To address this difficulty, investors and founders often use instruments that allow investment to be made immediately while postponing the determination of the final equity price until a future funding round. One such instrument is the iSAFE, commonly expanded as the India Simple Agreement for Future Equity.

It allows an investor to provide capital to an Indian startup at an early stage and receive equity shares upon the occurrence of a specified future event, generally at a valuation cap, discount or other pre-agreed conversion formula. The iSAFE model was introduced and popularised in India by 100X.VC in July 2019. Its model documentation includes valuation-cap, discount, valuation-cap-plus-discount and most-favoured-nation structures. However, the term “iSAFE” is a commercial or market expression and is not separately defined as a security under the Companies Act, 2013. Its legal treatment therefore depends on the instrument actually issued and the terms contained in the investment documents.

Meaning of an iSAFE Note

An iSAFE is an early-stage fundraising arrangement under which an investor contributes money to a startup in return for the right to receive equity shares in the future. The investor does not necessarily receive ordinary equity shares at the time of making the investment. The number and price of the equity shares are determined later when a defined conversion event takes place.

The conversion event may be a subsequent priced equity round, merger, acquisition, company sale, dissolution or expiry of a specified long-stop period. The exact event depends entirely on the wording of the iSAFE agreement and the terms of the underlying security. An iSAFE allows founders and investors to avoid fixing the company’s final valuation at the seed or pre-seed stage. Instead, the startup’s valuation is determined during a later institutional round when more commercial information may be available.

Is an iSAFE Really a “Note”?

The expression “iSAFE note” is commonly used in the startup ecosystem, but it can be legally misleading. A conventional note generally represents a debt obligation that may carry interest, have a maturity date and require repayment. An iSAFE may be designed as a non-debt investment instrument. Where it is structured through compulsorily convertible preference shares, the company issues a recognised security at the time of investment, and those preference shares later convert into equity shares.

This must not be confused with a statutory convertible note issued by a DPIIT-recognised startup. Under the recognised startup framework, a convertible note represents money initially received as debt, which may either be repaid or converted into equity. A DPIIT-recognised startup can receive Rs.25 lakh or more in a single tranche from a person through such a convertible note, and the instrument must be converted or repaid within a maximum period of 10 years. Therefore, the words “iSAFE”, “SAFE”, “convertible note” and “CCPS” should not be used interchangeably without examining the actual legal documents.

Legal Character of an iSAFE in India

The Companies Act, 2013 does not contain a separate category of security called an iSAFE. For this reason, simply signing a contract titled “iSAFE Agreement” does not automatically establish how the investment will be treated under Indian company law. In practice, an iSAFE transaction may be implemented by issuing Compulsorily Convertible Preference Shares, commonly known as CCPS. The investor receives CCPS at the time of investment, and the CCPS convert into equity shares when the agreed event occurs.

The CCPS structure provides the investment with an identifiable legal form under the Companies Act. Preference shares are governed by Section 55, while their issue through a preferential or private placement route may also attract Section 42, Section 62 and the applicable rules. A purely contractual promise to issue equity in the future may create uncertainty regarding its classification, deposit treatment, enforceability, accounting treatment and FEMA eligibility. Startups should therefore avoid blindly adopting a foreign SAFE template without adapting it to Indian law.

How an iSAFE Transaction Works

At the beginning of the transaction, the startup and investor agree on the investment amount and the commercial terms governing future conversion. These terms usually include a valuation cap, conversion discount, qualifying financing threshold, liquidity-event treatment and conversion timeline. The company then completes the applicable corporate approvals and security-allotment process. Where the instrument is structured as CCPS, the investor is allotted preference shares against the investment amount.

The startup uses the investment for its business operations. The investor generally waits until a defined conversion event occurs. Upon the occurrence of that event, the conversion formula is applied and the investor receives equity shares. The investor may receive more shares than an investor participating directly in the future round because the iSAFE investor accepted the higher risk of investing at an earlier stage.

Main Types of iSAFE Instruments

Valuation Cap iSAFE

A valuation-cap iSAFE specifies the maximum company valuation that will be used to calculate the investor’s conversion price. If the valuation in the next funding round is higher than the agreed cap, the iSAFE investor converts at the lower capped valuation. For example, an investor may invest when no final valuation is agreed, subject to a valuation cap of Rs.12 crore.

If the next priced round values the company at Rs.20 crore, the iSAFE investor may convert using the Rs.12 crore cap, subject to the agreed formula. A valuation cap does not necessarily mean that the company is presently valued at the capped amount. It is primarily a mechanism for calculating the conversion price and rewarding the investor for investing early.

Discount iSAFE

A discount iSAFE allows the investor to convert at a specified discount to the price paid by investors in the next qualified financing round. For example, where the next-round investors purchase equity shares at Rs.100 per share and the iSAFE provides a 20% discount, the iSAFE conversion price may be Rs.80 per share.

The discount applies to the future conversion price. It should not be confused with issuing shares below their face value or issuing securities in violation of Section 53 of the Companies Act. Section 53 generally prohibits a company from issuing shares at a discount except in limited statutory cases.

Valuation Cap and Discount iSAFE

This structure provides both a valuation cap and a conversion discount. The agreement normally specifies that the investor will receive the benefit of whichever mechanism produces the lower conversion price.

For instance, if the discounted price is Rs.80 per share but the valuation-cap formula gives a price of Rs.60 per share, the investor may convert at Rs.60 per share. The documents must clearly state whether the investor receives the lower of the two prices or whether another method applies. Ambiguous drafting can result in significant disputes at the time of conversion.

Most-Favoured-Nation iSAFE

A Most-Favoured-Nation, or MFN, iSAFE allows an early investor to adopt more favourable terms offered by the company to a subsequent iSAFE investor. For example, if the first investor signs an iSAFE without a valuation cap and the company later issues another iSAFE with a favourable cap, the first investor may be entitled to adopt the better term, depending on the MFN clause.

The company should define the scope of the MFN protection carefully. It should clarify whether the right applies to economic terms alone or also covers governance, information and liquidity rights. The four commonly published iSAFE model structures include valuation-cap, discount, cap-plus-discount and MFN variants.

Important Commercial Terms in an iSAFE

Investment Amount: The agreement should clearly record the total amount being invested and the account into which the money will be transferred. The amount should match the offer documents, valuation report, board approval, shareholder approval and return of allotment.

Valuation Cap: The valuation cap determines the maximum valuation used for calculating the conversion price. The agreement must clarify whether the cap is calculated on a pre-money or post-money basis. The definition of company capitalisation is equally important. It should specify whether founder shares, employee stock options, unallocated ESOP pools, warrants and other convertible securities are included in the denominator.

Conversion Discount: The discount gives the iSAFE investor a lower price than the price paid by future-round investors. The agreement should specify the percentage and identify the class of securities whose price will be used for comparison.

Qualified Financing: The agreement should define the minimum amount that must be raised in the future round for automatic conversion to take place. A small bridge investment should not unintentionally trigger conversion unless that is what the parties intended.

Long-Stop or Conversion Date: An iSAFE should specify what happens if the company does not complete a qualified financing within the agreed period. Model documents may provide for conversion upon a financing, liquidity event, dissolution or expiry of a specified period, but the actual agreement remains controlling.

Liquidity Event: A liquidity event may include a merger, acquisition, sale of substantial assets, change in control, share sale or initial public offering. The agreement should explain whether the investor receives equity conversion, repayment, a multiple of the investment or another amount upon such an event.

Liquidation Preference: Where the instrument is structured as preference shares, the terms may provide priority over equity shareholders in relation to the return of capital upon liquidation or another specified event. Liquidation preference is not automatically identical in every iSAFE. The documents should state whether it is participating or non-participating, whether it is capped and how it ranks against other preference shareholders.

Investor Rights: The documents should address whether the investor receives information rights, inspection rights, pro-rata participation rights, transfer restrictions, tag-along rights or other contractual protections before or after conversion. An iSAFE investor may not automatically receive voting rights equivalent to an equity shareholder. The rights depend on the class of security issued, the Articles of Association and the investment documents.

Conversion of an iSAFE into Equity Shares

Conversion is the process through which the investor’s iSAFE-linked security becomes equity share capital. The number of shares issued depends on the investment amount and the conversion price calculated under the agreement.

A simplified calculation is:

Number of equity shares = Investment amount ÷ Applicable conversion price

Where only a discount applies:

Discounted price = Price in the qualified financing × (1 – Discount percentage)

Where a valuation cap applies:

Cap price = Valuation cap ÷ Company capitalisation

Where both a cap and discount apply, the agreement may allow conversion at the lower of the discounted price and the cap price.

Illustrative Conversion Example

Assume that an investor contributes Rs.50 lakh under an iSAFE carrying a valuation cap of Rs.12 crore and a 20% discount.

The startup subsequently raises a qualified financing round at a pre-money valuation of Rs.20 crore. New investors subscribe at Rs.100 per equity share.

Under the discount method, the conversion price would be:

Rs.100 – 20% = Rs.80 per share.

Assume that the valuation-cap formula, after applying the contractually defined fully diluted capitalisation, produces a cap price of Rs.60 per share. Since Rs.60 is lower than Rs.80, the iSAFE investor may convert at Rs.60 per share, provided the agreement gives the benefit of the lower price.

The approximate number of shares would therefore be:

Rs.50,00,000 ÷ Rs.60 = 83,333.33 shares.

The final number will depend on the contractual rounding method, authorised capital, face value, securities premium and the precise capitalisation definition. Fractional shares may need to be rounded or otherwise dealt with under the agreement.

Conversion Events

Qualified Equity Financing

The most common conversion event is a future priced funding round. When the company raises the minimum amount specified in the iSAFE agreement, the instrument automatically converts into equity or the same class of securities issued in that round. The documents should clarify whether the iSAFE converts into ordinary equity shares or a shadow series of preference shares carrying substantially similar economic rights to the new-round securities.

Liquidity Event

If the company is acquired before completing a priced round, the agreement may permit conversion immediately before the transaction or payment of an agreed amount from the sale proceeds. The agreement should clearly identify the priority of the iSAFE investor relative to creditors, preference shareholders, founders and ordinary equity shareholders.

Dissolution or Winding Up

Where the company is dissolved before conversion, the investor may have a contractual or preference-share right to receive the investment amount before distributions are made to equity shareholders. However, payment remains subject to the rights of secured lenders, statutory creditors, employees and other persons having superior legal claims.

Long-Stop Conversion

Some iSAFE documents provide for conversion after a defined period even if no qualified financing has occurred. The conversion may be based on the valuation cap, a fresh valuation or another formula. The company must ensure that such long-stop conversion is consistent with the original terms approved by its shareholders and the valuation method selected under the Companies Act.

Companies Act Compliance for Issuing an iSAFE

Review of the Articles of Association

The company should first examine whether its Articles of Association authorise the issue of preference shares and the proposed rights attached to them. Where the Articles do not contain the required authority, they should be amended before the CCPS are issued. Any investor rights that affect share capital, voting, transfer or liquidation should also be reflected in the Articles where legally necessary.

Availability of Authorised Share Capital

The company must verify whether it has sufficient authorised preference-share capital to issue the CCPS and sufficient equity-share capital to complete future conversion. If the authorised capital is inadequate, the company must increase it and alter its capital clause before allotment or conversion, as applicable. Planning only for the initial CCPS allotment and ignoring the equity shares required on conversion is a common startup compliance error.

Valuation by a Registered Valuer

A preferential issue under Section 62(1)(c) must generally be supported by a valuation report from a registered valuer. Rule 13 requires the issue price of shares and other convertible securities to be determined based on such valuation, and the issue price cannot be lower than the valuer-determined price. For convertible securities, the company may determine the price of the resulting shares either at the time of issuing the convertible instrument or closer to the conversion date. The selected approach should be disclosed and approved at the initial offer stage. The valuation report should be aligned with the conversion formula. A valuation cap or discount written into the agreement cannot override the statutory valuation requirements.

Board Approval

The Board of Directors should consider and approve the proposed fundraising, draft offer documents, valuation report, iSAFE or subscription agreement, terms of CCPS, notice of the shareholders’ meeting and identified investors. The board documents should clearly state the investment amount, number of securities, issue price, conversion terms, rights attached to the instrument and proposed use of funds.

Shareholders’ Special Resolution

A preferential issue to identified investors generally requires approval through a special resolution under Section 62(1)(c), read with the applicable rules. The explanatory statement must contain the prescribed disclosures, including the object of the issue, number of securities, price, valuation basis, proposed allottees, change in control and other material terms. The resolution and the terms should be broad enough to cover the complete conversion mechanism. Any later material change may require fresh corporate approvals.

Private Placement Compliance

Where the investment is raised through private placement, Section 42 and Rule 14 become applicable. The offer must be made only to specifically identified persons and cannot be advertised or offered to the public. The number of persons to whom private placement offers may be made is generally restricted to 200 persons in aggregate during a financial year for each kind of security, excluding qualified institutional buyers and employees receiving securities under an employee stock option scheme.

The company should issue the prescribed private placement offer-cum-application letter in Form PAS-4 and maintain the private placement record in Form PAS-5. The forms and supporting documents should be consistent with the iSAFE agreement.

Receipt of Investment Funds

Subscription money must be received through banking channels from the bank account of the identified investor. Cash collection is not permitted for a private placement. The company should maintain the money in the prescribed bank account and should not utilise it before allotment has been completed and the return of allotment has been filed.

The remitter’s name, bank account and amount should match the offer and allotment records. Payments from unrelated third parties can result in compliance and beneficial-ownership concerns.

Allotment Within the Prescribed Period

Under Section 42, the company must allot the securities within 60 days from the date on which the application money is received. If the company cannot complete the allotment within that period, it must refund the money within the following 15 days. A failure to refund within that time attracts interest at 12% per annum from the end of the sixtieth day. The company should therefore complete the valuation, approvals and documentation before receiving funds wherever possible.

Filing of Return of Allotment

After allotment, the company must file the prescribed return of allotment in Form PAS-3 with the Registrar of Companies within 15 days. The filing must contain the allottee details and prescribed attachments. Until the return of allotment is filed, private placement funds should not be used in violation of Section 42. The company must also update its statutory registers, capitalisation table and beneficial-ownership records and complete share-certificate or dematerialisation formalities, as applicable.

Preference-Share Requirements

Where iSAFE is implemented through CCPS, Section 55 and the Companies (Share Capital and Debentures) Rules must be followed. The Articles must authorise the issue, shareholders must approve the terms, and the company should not have subsisting defaults in the redemption of preference shares or payment of preference dividends where the applicable rule restricts further issues.

Indian company law does not permit irredeemable preference shares. Preference shares generally cannot have a tenure exceeding 20 years, except for the specific infrastructure-project frame. A compulsorily convertible structure should therefore prescribe a clear conversion period within the permitted legal tenure.

Legal Compliance at the Time of Conversion

The occurrence of a conversion trigger should be formally documented. The company should determine the qualified financing price, discount price, cap price and final conversion ratio in accordance with the approved documents. The Board should record the conversion, approve the allotment of resultant equity shares and confirm that sufficient authorised equity capital is available. Where the selected valuation approach requires valuation near the conversion date, the company should obtain a fresh registered-valuer report within the applicable statutory timeframe.

The company should file the relevant return of allotment, update the register of members, cancel or convert the CCPS records, complete the required depository or certificate process and update its capitalisation table. The terms recorded in the original special resolution, offer letter, Articles and investment agreement should be compared before conversion. A conversion formula that materially differs from the approved terms may require fresh shareholder approval.

Section 53 and Conversion Discount

The “discount” provided under an iSAFE generally refers to a discount against the future financing-round price. It does not mean that the company is permitted to issue shares below their face value.

Section 53 prohibits the issue of shares at a discount except in specifically permitted cases. In addition, the preferential issue price must comply with the registered-valuer requirement under Rule 13. Accordingly, the contractual discount and valuation cap should be drafted so that the final conversion price remains legally permissible.

FEMA Compliance for Foreign Investors

An iSAFE investment by a person resident outside India requires additional scrutiny under the Foreign Exchange Management Act, the Non-Debt Instruments Rules and RBI directions. For foreign-investment purposes, fully paid and fully and mandatorily convertible preference shares are treated as equity instruments. Optionally or partially convertible preference shares are generally treated as debt instruments and may fall outside the ordinary FDI charter. The conversion price or conversion formula must be determined upfront when the convertible instrument is issued. The price on conversion cannot be lower than the fair value calculated at the time of issuance under the applicable FEMA pricing rules.

The investment must also comply with the applicable entry route, sectoral cap, investment limits, beneficial-ownership restrictions and sector-specific conditions. An optionality or exit provision cannot guarantee the foreign investor an assured return or a predetermined exit price. The company must receive the funds through a permitted banking channel, complete KYC and banking documentation and make the applicable foreign-investment filing, including Form FC-GPR where prescribed.

A foreign investor should not invest under a generic contract merely labelled as an iSAFE unless the instrument qualifies under FEMA. Where a statutory convertible note is used instead, the issuing company must be an eligible Indian startup, the investment must be at least ?25 lakh in a single tranche, and conversion or repayment must occur within 10 years.

Tax Treatment of iSAFE Investments

Tax at the Time of Investment

The tax treatment depends on the legal form of the instrument. Where the company issues CCPS, the amount is generally recorded as share capital and securities premium based on the terms of issue. The former angel-tax provision under Section 56(2)(viib) is not applicable from Assessment Year 2025-26.

However, its removal does not eliminate every tax issue connected with startup securities. Transactions involving inadequate consideration, related parties, non-residents or unusual valuation terms should still be examined under the remaining provisions of the income provisionarch2?turn785540search16?

Tax at the Time of Conversion

Section 47(xb) provides that conversion of preference shares into equity shares of the same company is not regarded as a transfer for capital-gains purposes. Therefore, where the iSAFE is properly structured as preference shares, conversion into equity shares should generally not create an immediate capital-gains liaearch0?turn785540search3?

The cost of the preference shares is carried over as the cost of the equity shares received on conversion. For calculating the holding period of the resultant equity shares, the period during which the preference shares werearch4?turn785540search7?

Tax on Subsequent Sale

When the investor later sells the equity shares, capital gains are calculated using the applicable sale consideration, carried-forward cost and holding period. The applicable tax rate will depend on whether the shares are listed or unlisted, the investor’s residential status, the period of holding and the law applicable in the year of sale. For foreign investors, tax-treaty eligibility, withholding obligations and repatriation documentation may also need to be examined.

Accounting Treatment of iSAFE

The accounting classification should be determined from the substance of the instrument and not merely from the title “iSAFE”. Where the company has legally issued CCPS, the accounting team should examine the conversion obligation, redemption terms, dividend rights, settlement alternatives and other contractual conditions under the accounting standards applicable to the company.

An instrument may be classified as equity, a financial liability or a compound financial instrument depending on its terms and the applicable accounting outline. The company should obtain its auditor’s view before finalising the documentation. The accounting treatment in the books of the investor may also differ depending on whether the investor applies Accounting Standards, Ind AS or another regulatory framework.

Stamp Duty and Dematerialisation

The company should examine the stamp-duty requirements applicable to the issue of CCPS, execution of investment documents and issuance of resultant equity shares. Stamp-duty treatment may depend on the nature of the document, place of execution, state amendments and whether the securities are issued in physical or dematerialised form.

The company must also review whether the mandatory dematerialisation provisions applicable to unlisted companies cover it. Where dematerialisation is required, the ISIN and depository arrangements should be completed before the allotment or transfer of securities.

Advantages of iSAFE Funding

An iSAFE may help a startup complete an early-stage fundraising transaction without immediately negotiating every aspect of a priced equity round. This may reduce commercial negotiation and allow the company to receive growth capital more quickly.

It postpones the final valuation discussion until the company has more operational data, customers, revenue or institutional investor interest. For investors, the valuation cap or discount provides compensation for accepting early-stage risk. The investor may receive a larger number of shares than investors entering during the future priced round. An iSAFE can also reduce the immediate cap-table negotiation between founders and investors, although the economic dilution remains and becomes visible upon conversion.

Risks for Founders

Founders may underestimate the dilution arising from multiple iSAFE instruments. Each investment may appear small when signed, but the combined conversion effect can substantially reduce promoter ownership during the next funding round. A valuation cap that is too low can result in significant dilution. A post-money cap can create a different ownership outcome from a pre-money cap, particularly where several instruments are outstanding.

MFN provisions can allow earlier investors to adopt more favourable terms granted in later transactions, increasing the eventual dilution. Founders must also ensure that the company has sufficient authorised capital, completes private placement filings and correctly records every outstanding convertible instrument in its cap table.

Risks for Investors

An iSAFE investor may not receive immediate equity voting rights. The investor’s protection depends on the rights attached to the CCPS, the Articles and the investment agreement. If the company never completes another financing round, the investor may need to rely on a long-stop conversion, liquidity-event provision or dissolution right.

The investor should verify whether the valuation cap is pre-money or post-money and whether the ESOP pool and outstanding convertibles are included in the capitalisation calculation. An investor should also examine whether the company has completed valid corporate approvals. A signed agreement without proper allotment, valuation and statutory filings may expose the investor to enforceability and regulatory risks.

Important Documents for an iSAFE Transaction

A properly structured transaction may require an iSAFE or investment agreement, CCPS subscription agreement, valuation report, amended Articles of Association, board resolutions, shareholders’ special resolution, explanatory statement, PAS-4 offer letter, PAS-5 record, PAS-3 return of allotment and statutory register entries.

Depending on the transaction, the parties may also require a shareholders’ agreement, disclosure letter, founder undertakings, intellectual-property assignments, employment documents, foreign-investment filings, tax certificates and depository documents. The documents must be read together. The conversion provisions in the investment agreement should not conflict with the Articles, valuation report or shareholder resolution.

Compliance Checklist for Startups

Before raising money, the startup should identify whether the investor is resident or non-resident and decide whether the instrument will be CCPS, CCD, statutory convertible note or another legally recognised security. The company should review its Articles, authorised capital, DPIIT status, sectoral restrictions and existing investment agreements. It should then obtain a valuation report and approve the complete conversion formula.

Before receiving funds, the company should complete the board and shareholder approvals and issue the prescribed private placement documents. Funds must be received from the investor’s bank account through permitted banking channels. After receipt, the company must complete allotment within the statutory period, file PAS-3, update statutory registers and issue the relevant securities in the prescribed form. At conversion, the company should recalculate the conversion ratio, obtain any required fresh valuation, verify authorised equity capital, approve the allotment and complete ROC, FEMA, tax and depository formalities.

Conclusion

An iSAFE can be an effective fundraising instrument for an early-stage Indian startup because it allows the company to obtain capital without immediately completing a fully priced equity round. It also provides early investors with economic protection through a valuation cap, discount or other favourable conversion mechanism. However, an iSAFE is not a substitute for proper legal compliance. The label itself has no independent statutory status under Indian company law. The transaction must be implemented through a legally recognised instrument, commonly CCPS, and must comply with the Companies Act, private placement rules, valuation requirements, FEMA, income-tax provisions and applicable accounting standards.

Founders should carefully model the expected dilution before signing multiple iSAFE agreements. Investors should examine the company’s approvals, valuation, capitalisation definition, conversion formula and rights before transferring funds. Professionally drafted documentation and timely regulatory filings are essential to ensure that the investment converts smoothly during the company’s future funding round.

Frequently Asked Questions

Q1. What is the full form of iSAFE?

Ans. iSAFE generally stands for India Simple Agreement for Future Equity. It is an early-stage fundraising arrangement that allows an investor to provide money now and receive equity shares upon a future conversion event.

Q2. Is an iSAFE recognised under the Companies Act?

Ans. The expression “iSAFE” is not separately defined as a statutory security under the Companies Act. Its legal treatment depends on the actual instrument issued. Many transactions use CCPS to provide the investment with a recognised legal structure.

Q3. Is an iSAFE a loan?

Ans. An iSAFE is not necessarily a loan. When structured through CCPS, it represents an investment in compulsorily convertible preference shares rather than an ordinary repayable loan. However, the documents must be examined to determine its true legal and accounting character.

Q4. Is iSAFE the same as a convertible note?

Ans. No. A statutory convertible note issued by an eligible DPIIT-recognised startup may be converted into equity or repaid within 10 years and is subject to a minimum investment of ?25 lakh in a single tranche. An iSAFE structured through CCPS follows a different legal route.

Q5. Does the investor receive shares immediately?

Ans. Where the transaction is structured through CCPS, the investor receives preference shares at the time of allotment. Ordinary equity shares are received later when the CCPS convert according to the agreed terms.

Q6. What is a valuation cap?

Ans. A valuation cap is the maximum valuation used to calculate the iSAFE investor’s conversion price. If the company’s future financing valuation exceeds the cap, the investor may convert at the lower capped valuation.

Q7. What is a conversion discount?

Ans. A conversion discount allows the iSAFE investor to obtain shares at a price lower than the price paid by investors in the next qualified financing round.

Q8. Can an iSAFE have both a cap and discount?

Ans. Yes. The agreement may provide both. It commonly allows the investor to use whichever method results in the lower conversion price, but the exact rule must be expressly stated.

Q9. Is valuation required for issuing an iSAFE?

Ans. Where convertible securities are issued through a preferential allotment, a registered-valuer report is generally required under the Companies Act framework. Additional valuation requirements apply when the investor is a non-resident.

Q10. Can a foreign investor invest through an iSAFE?

Ans. A foreign investor may invest only through an instrument and process permitted under FEMA. Fully paid and fully and mandatorily convertible preference shares may qualify as equity instruments, subject to pricing, sectoral, entry-route and reporting requirements.