Introduction

• iSAFE (India SAFE) is an adaptation of the SAFE (Simple Agreement For Future Equity) document. Commonly used for seed-stage funding, they allow startups to raise funds quickly without valuation complexity.
• 100X.VC, an early-stage investment firm in India was the first to introduce the iSAFE in India in July 2019. It entails an agreement to acquire equity shares of a startup at a later date.
• An iSAFE note is not a debt instrument but a convertible security note beneficial for both startups and investors.
• In India, iSAFE note takes a legal form of Compulsorily Convertible Preference Shares (CCPS) which are convertible on the occurrence of specific events.
• They are governed by sections 42, 62, and 55 of the Companies Act, 2013 read with Companies (Share Capital and Debentures) Rules, 2014 and Companies (Prospectus and Allotment of Securities) Rules, 2014
• Issuing iSAFE notes does away with the valuation exercise since the valuation is essentially postponed to a later date (when the priced round happens)
• An outstanding iSAFE note would be referenced on the startup’s cap table like any other convertible security.

Difference between iSAFE Notes and CCPS

CCPS holders enjoy the following advantages over iSAFE Noteholders:

• CCPS holders usually get a right to exit in a Shareholders Agreement (SHA). iSAFE Notes can only be converted to equity on the occurrence of a liquidation event.
• CCPS holders may get a board seat. It is not common for iSAFE holders to have a board seat in the startup.
• When issuing CCPS, a third-party valuation is typically necessary. Issuing iSAFE Notes does not require a third-party valuation.

Benefits to Investors

• No dilution occurs in the cap table until the occurrence of the priced round or an early conversion.
• The duration to conclude the deal is reduced by at least a few weeks, attributed to the time saved in drafting a SHA and the accompanying multiple iterations.
• If the event of liquidation, the iSAFE Note holders get a preference over the founders and other equity shareholders. They get a higher right to receive whatever money is left in the startup, helping them recover at least a part of their investment.

Benefits to Startups

• Since iSAFE Notes are not classified as debt, no interest accrues on iSAFE Notes.
• An iSAFE note is a simple agreement. The startup will save significant money in engaging lawyers to draft detailed SHAs.

This content is meant for information only and should not be considered as an advice or legal opinion, or otherwise. AKGVG & Associates does not intend to advertise its services through this.