“iSAFE” stands for India Simple Agreement for Future Equity. An investor makes cash
return for a convertible instrument. An iSAFE note is not a debt instrument, but is
intended to be an alternative
to a convertible note, that is beneficial for both startups and investors. To comply
with applicable Indian law,
iSAFE note takes the legal form of compulsorily convertible preference shares (CCPS)
which is convertible on
occurrence of specified events.
How will an investment in iSAFE happen?
The investor and the startup agree on the investment amount, mutually sign an iSAFE
agreement and the
investor sends the startup the investment amount post completion of applicable legal
formalities. An outstanding iSAFE note would be referenced on the company’s cap
table like any other
convertible security (such as a warrant or an option).
To whom will the startup issue iSAFE notes?
iSAFE notes are to be issued by the start up in favour of the investors i.e. iSAFE
What are the benefits to the startup of receiving the FIRST investment through an
First and foremost is the point with respect to valuations. Early stage bootstrapped
(Start-ups) are generally either at Idea, MVP (Minimum Viable Product) or Very Early
and hence it’s unfair to assign a valuation so early in the lifecycle. iSAFE notes
do away with the need
to state pre-money or post money valuation, as the equity in favour of iSAFE note
holders is issued
much later viz. at an equity pricing round, once the start-up has achieved some
Secondly, In India, even at seed stage funding, Angel networks / VCs use big fat one
agreements with entrepreneurs. iSAFE note intends to obviate the need of such long
SHA (Share Holder Agreements).
1) No legal cost, template driven, simple 6 page agreement
2) Favourable terms for entrepreneurs
3) Quick closure of the first funding round, when funds are so essential and timing
is very important
Why iSAFE notes should be preferred investment instruments in India?
An iSAFE is neither debt nor equity, and there is no interest accruing, (though for
compliance purposes, iSAFE note carry a non-cumulative dividend @ 0.0001%). If the
whatever money they have left after discharging other liabilities, will be returned
note holders in preference over the equity shareholders until iSAFE note holders
investment amount. Such liability is on the company, not on the founder
individually. A convertible
note is debt, while an iSAFE note is a convertible security that is not debt.
When do iSAFE notes convert to equity shares?
iSAFE notes are automatically convertible into equity shares either on occurrence on
liquidity events viz. next pricing / valuation round, dissolution, merger /
acquisition etc., or at the end
of 3 years from date of it’s issue, whichever is earlier.
Do iSAFE note holders have liquidity preference over Equity holders / Promoters /
Yes, iSAFE note holders have liquidity preference (to the extent of their invested
Founders / Equity shareholders.
Do FIRST iSAFE note holders have liquidity preference over subsequent iSafe note
First iSAFE note holders will have pari-passu rights with subsequent iSAFE note
Can a startup issue iSAFE notes to subsequent investors?
For the same reasons mentioned in reply no 4, we recommend startups to keep issuing
iSAFE notes, post the first iSAFE note as necessary. It helps the startup in
securing a rightfully
deserved higher valuation subsequently in a PRICING round (where pre and post money
get discussed), when the startup has gained significant revenue / business traction,
such that a fair
valuation is possible.
How will the iSAFE note be reflected in the startup’s financials and will the
authorised & paid up capital go up by the amount of investment made under iSAFE
Investment will be reflected as CCPS – Compulsorily Convertible Preference Shares in
financial statements. Yes, the authorised and paid up capital will have to be
increased by the extent of
investment made under iSAFE note.