How to Review a SAFE or iSAFE in India (With the Dilution Maths)

A SAFE, a Simple Agreement for Future Equity, is a one-document promise: an investor hands over money now, and gets shares later, priced by a formula written into the agreement rather than negotiated today. Y Combinator created it in the US in 2013 to skip the paperwork and interest mechanics of a convertible note. The one thing founders and first-time angels get wrong in India: they use a US SAFE template unmodified. It does not fit Indian company law or India's foreign exchange rules, which is why almost every serious Indian pre-seed and seed round today uses an iSAFE (structured as CCPS) or a convertible note instead of a bare SAFE. This guide (published by Adira, which makes contract review and CLM software, so we have a commercial stake in you getting good at this, but the guide stands on its own) walks through the mechanics with worked numbers, the specific India problem, and what to check before signing either instrument.

What a SAFE actually is

Strip away the acronym and a SAFE is short: an investor pays an agreed amount today. No interest accrues, no maturity date forces repayment, and no valuation is set at signing. Instead the agreement fixes a formula, a valuation cap, a discount, or both, that converts the money into equity once a defined trigger happens, usually the next priced round ("Qualified Financing"), sometimes an acquisition or IPO. Until then, the SAFE sits on the cap table as a promise, not shares and not debt.

This is what makes a bare SAFE attractive: no valuation argument on day one, a short document, no interest to track. It is also what makes it a poor fit for Indian law, because Indian statute has narrow, specific categories for money a company can receive without either allotting shares quickly or the receipt counting as a regulated "deposit."

The India problem: why a bare SAFE does not map cleanly

Two Indian legal regimes make a literal, unmodified US SAFE risky here.

First, the Companies Act's deposit rules. Section 2(31) of the Companies Act, 2013 defines "deposit" in deliberately broad terms:

"'deposit' includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India." Source: Section 2(31), Companies Act, 2013 (Indian Kanoon)

Almost any amount a company receives defaults into this definition unless it fits an exclusion in the Companies (Acceptance of Deposits) Rules, 2014. Two exclusions matter here, and a bare SAFE sits outside both.

Rule 2(1)(c)(vii) excludes share application money or an advance towards allotment, but only if the company allots within 60 days of receipt; if not, the amount must be refunded within 15 days, or it becomes a deposit. A real SAFE's whole point is that conversion is contingent and can stay unresolved for years, sometimes never happening, incompatible with a 60-day clock.

Rule 2(1)(c)(xviia) separately excludes convertible notes, narrowly: the issuer must be a DPIIT-recognised start-up, the amount must be Rs 25 lakh or more per tranche, and the instrument must be "an instrument evidencing receipt of money initially as a debt, which is repayable at the option of the holder, or which is convertible into ... equity shares ... upon occurrence of specified events," within a period now capped at 10 years. A US-style SAFE typically gives the holder no repayment right at all, which sits uneasily with an exclusion written around an instrument "initially a debt."

Source: Rule 2(1)(c), Companies (Acceptance of Deposits) Rules, 2014 (Indian Kanoon)

Miss both carve-outs and the money risks being an unauthorised "deposit." Section 73(1) generally bars a company from accepting deposits outside the manner Chapter V allows, and Section 76A sets the penalty: a fine of Rs 1 crore to Rs 10 crore for the company (or twice the deposit amount if lower), plus repayment with interest, and imprisonment up to 7 years or a fine of Rs 25 lakh to Rs 2 crore for every officer in default.

Source: Section 73, Companies Act, 2013 (CAIRR)

Second, FEMA, if the investor is not resident in India. The Foreign Exchange Management (Non-debt Instruments) Rules, 2019 let a foreign investor hold only recognised "equity instruments": equity shares, CCPS, CCDs, and share warrants. A bare SAFE is none of these, so it cannot be reported to the RBI through the standard FC-GPR route, and foreign money must be allotted within 60 days of receipt (refunded within 15 days after) at fair value, the same clock problem as above.

Nothing in Indian law says "SAFEs are banned," but a literal US SAFE, held to term, tends to fail the specific mechanical tests both regimes apply. That is why the market moved to two India-native alternatives.

How the market fixed it: iSAFE and convertible notes

iSAFE. Launched by VC firm 100X.VC in July 2019, the iSAFE keeps a SAFE's commercial logic, cap, discount, deferred pricing, but wraps it in a recognised instrument: an agreement to issue Compulsorily Convertible Preference Shares (CCPS), under Sections 42, 55, and 62 of the Companies Act, 2013, read with the Companies (Share Capital and Debentures) Rules, 2014. Because CCPS is a recognised FEMA equity instrument, a foreign investor's money reports through FC-GPR normally, and because it is a share allotment rather than an open-ended promise, it sidesteps the deposit-rules problem too.

Convertible notes. The other route uses the Rule 2(1)(c)(xviia) carve-out directly: a debt instrument, repayable at the holder's option or convertible into equity, issued by a DPIIT-recognised start-up in tranches of Rs 25 lakh or more, usually carrying interest and an explicit repayment right. See how to review a convertible note in India.

Both routes exist because Indian law has no category for "money now, shares later, no debt, no fixed timeline," which is what a bare SAFE is. An iSAFE makes the shares real from day one, priced later; a note makes the debt real from day one.

The mechanics, with worked numbers

Three variables decide the payout: cap, discount, and trigger. Worked example, using an iSAFE:

An angel invests Rs 50,00,000 through an iSAFE with a Valuation Cap of Rs 10,00,00,000 and a Discount of 20%. The company has 1,00,00,000 fully diluted shares outstanding at the time. Fourteen months later it raises a Series A at a Rs 25,00,00,000 pre-money valuation, with a new investor putting in Rs 5,00,00,000.

Round price = pre-money valuation / pre-round fully diluted shares = Rs 25,00,00,000 / 1,00,00,000 = Rs 25.00/share.

Cap price = Valuation Cap / pre-round fully diluted shares = Rs 10,00,00,000 / 1,00,00,000 = Rs 10.00/share.

Discount price = Rs 25.00 x (1 - 0.20) = Rs 20.00/share.

The lower of the two prices governs, since a lower price means more shares for the same rupees. Here Rs 10.00 (cap) beats Rs 20.00 (discount), so the cap applies. Shares issued = Rs 50,00,000 / Rs 10.00 = 5,00,000 CCPS.

Without a cap, the angel would have converted at the plain round price of Rs 25.00, getting only 2,00,000 shares, a 1.64% stake once Series A's 20,00,000 new shares (Rs 5,00,00,000 / Rs 25.00) are added. With the cap, the angel holds 5,00,000 of 1,25,00,000 fully diluted shares, a 4.0% stake, roughly 2.4 times more for the identical cheque. That gap is the entire reason valuation caps exist: compensation for capital committed before the company had a market price.

The trigger definition matters as much as the numbers. Check what counts as a "Qualified Financing" (usually a minimum raise size, so a small bridge round cannot force conversion at a depressed price), what happens on an acquisition before any priced round, and what happens if neither ever occurs; some instruments convert automatically after a long-stop date, others simply sit unconverted.

Pro-rata and MFN rights

A pro-rata right lets the investor put in more money at the next priced round to hold their percentage, rather than being diluted. Check whether it is a real contractual right or just a stated "intention."

A Most Favoured Nation (MFN) clause protects an early holder if the company later issues another SAFE or note on better terms, a lower cap, a bigger discount, before either converts, so the first investor is not stuck with worse terms purely for moving first. See our MFN guide for the scope, notice, and sunset mechanics that decide whether it actually works.

Red flags

Normal	Red flag	Why it matters
Instrument is an iSAFE (CCPS) or a proper convertible note meeting Rule 2(1)(c)(xviia)	A bare US SAFE template used unmodified	Falls outside both deposit-rules carve-outs; risks Section 73 exposure
Foreign investor's instrument is CCPS, CCD, equity shares, or warrants	Foreign investor is asked to sign a bare SAFE	Not a recognised equity instrument under the NDI Rules; FC-GPR cannot be filed cleanly
Cap and discount both defined, with "lower of the two" stated expressly	Only one defined, or silent on which applies	Investor may overpay, or a dispute arises over which price governs
"Fully diluted" is defined, naming what is included (ESOP pool, other SAFEs)	"Fully diluted" undefined, or excludes the pool	Changes the cap price materially; a frequent post-round dispute
"Qualified Financing" has a minimum raise threshold	Any priced round, however small, triggers conversion	A tiny bridge round can force conversion at an unintended price
Long-stop date or acquisition mechanics stated	Silent on what if no priced round ever occurs	Instrument can sit unresolved indefinitely on the cap table
Pro-rata right is a binding obligation on the company	Described as the company's "intention" only	Not enforceable if the company chooses not to offer the allocation
MFN, if present, names a comparator class, notice period, and sunset	MFN says "any other investor," no notice or expiry	A vague MFN is close to worthless in a dispute; see the MFN guide

Bad clause, better clause

Bad: "The Company may issue this SAFE to the Investor in exchange for the Purchase Amount. Upon an Equity Financing, this SAFE will convert into shares of the class issued in that Equity Financing at the price per share paid by investors in that financing, subject to a Discount of 20%."

What is wrong: no valuation cap, no defined fully diluted basis, no minimum raise size for an "Equity Financing," and no reference to CCPS or the Companies Act sections it should be issued under.

Better: "The Company shall issue Compulsorily Convertible Preference Shares ('CCPS') to the Investor for the Purchase Amount of Rs [amount], pursuant to Sections 42, 55 and 62 of the Companies Act, 2013. Upon a Qualified Financing (a priced round raising not less than Rs [X] from investors other than existing security holders), the CCPS shall convert at the lower of (a) the Valuation Cap of Rs [amount] divided by the Company's fully diluted share capital (including the full ESOP pool and all other convertible securities, as-converted) immediately before the Qualified Financing, and (b) the round's price per share reduced by a Discount of 20%. If no Qualified Financing, acquisition, or IPO occurs before [long-stop date], the CCPS shall [convert at the Valuation Cap price / remain outstanding], as the parties elect."

What changed: the instrument is named as CCPS, tied to the specific Companies Act sections, the fully diluted basis is precise enough to compute without argument, a minimum raise size gates the trigger, and a long-stop date closes the gap.

How this interacts with related documents

• The term sheet. An iSAFE or note is signed before a term sheet exists; the cap-table math here feeds directly into the Series A term sheet later. See how to review a term sheet in India.
• Convertible notes. If your round uses a note instead, the deposit-rules analysis above applies directly. See how to review a convertible note in India.
• MFN clauses. Multiple iSAFEs or notes issued over a bridge period commonly carry MFN rights against each other; model the cascade before agreeing to a low cap. See the MFN guide.

You can mark up a SAFE, iSAFE, or convertible note clause by clause, and check the fully diluted definition against the rest of the document, for free in Weave.

US and global contrast

In the US, a bare SAFE works cleanly because US corporate law has no Indian-style "deposit" regime, and no FEMA-equivalent control on a US investor funding a US company. Y Combinator's standard SAFE, unmodified, is genuinely usable there. The two common global variants are "post-money" (the cap applies after the SAFE round is accounted for, giving certainty on the exact post-conversion percentage) and "pre-money" (the older structure, where other SAFEs converting alongside complicate the math). Most India-market iSAFEs still use pre-money-style mechanics, so do not assume a "post-money SAFE" habit from US material carries over without checking which version is in front of you.

FAQ

Can an Indian startup just use the standard Y Combinator SAFE template? Not safely, unmodified. A bare SAFE tends not to fit either the share-application-money exclusion (60-day allotment clock) or the convertible-note exclusion (must be structured as debt), risking treatment as an unauthorised deposit under Section 73. Most Indian rounds use an iSAFE (issued as CCPS) or a proper convertible note instead.

Is an iSAFE legally the same thing as a SAFE? Commercially yes, cap, discount, and deferred pricing work the same way. Legally no: an iSAFE is an agreement to issue CCPS under Sections 42, 55, and 62 of the Companies Act, which is why it is recognised under both the deposit rules and FEMA's equity-instrument list, while a bare SAFE is neither.

Can a foreign investor use a SAFE to invest in an Indian startup? Not directly and cleanly. The NDI Rules let a non-resident hold only recognised equity instruments, equity shares, CCPS, CCDs, and warrants. A SAFE is not on that list, so it cannot be reported through the standard FC-GPR process. Foreign investors typically get CCPS via an iSAFE, or a convertible note instead.

What is the difference between the valuation cap and the discount, and which applies? The cap sets a maximum price per share against fully diluted shares before the round. The discount gives a straight percentage off the round's actual price. A well-drafted instrument uses the lower of the two, since a lower price means more shares for the same investment.

What happens if the company never raises a priced round? Entirely dependent on the instrument's text. Some specify a long-stop date after which conversion happens automatically at the cap price, or repayment falls due for a note. Others are silent, and the instrument sits unresolved on the cap table indefinitely.

Does a convertible note need DPIIT start-up recognition? Yes, for the Rule 2(1)(c)(xviia) deposit-rules exclusion. It applies only to a "start-up company" recognised under the DPIIT notification, and only for Rs 25 lakh or more per tranche. Without that recognition, a company cannot use this route.

This guide gets you to understanding how a SAFE, iSAFE, or convertible note works, why a bare US SAFE is risky under Indian statute, and the numbers to check before signing. It does not tell you whether the instrument in front of you, given your DPIIT status, investor residency, and share count, is correctly structured, that depends on facts this page cannot see, and is not legal advice. Talk to a lawyer, and a chartered accountant for the FEMA and tax angles, before you issue or accept one.