SAFE

A Simple Agreement for Future Equity (SAFE) is a contract under which an investor pays the company today in exchange for the right to receive equity in a future qualified financing round, at a price determined by a valuation cap and / or discount.

SAFEs were introduced by Y Combinator in 2013 to replace convertible notes in seed-stage US deals. They are not debt — no maturity date, no interest, no obligation to repay.

Two standard variants:

• Pre-money SAFE — calculates conversion using the pre-money valuation (the original 2013 form).
• Post-money SAFE — calculates conversion using the post-money valuation at the time of issuance (introduced in 2018, now market default in the US).

Standard conversion terms:

• Valuation cap — maximum company valuation at which the SAFE converts (regardless of the priced round's higher valuation).
• Discount — typically 10–25%, applied to the priced round's per-share price.
• The investor gets shares at the better of cap-price or discount-price.

Indian-context complications:

SAFEs are not a creature of Indian company law. The Companies Act 2013 does not enumerate them. Key compliance and tax issues:

• FEMA / FDI: SAFE is not listed as a recognised capital instrument under the NDI Rules 2019. If issued to a non-resident, RBI may not accept the inflow as FDI. Most Indian startups use convertible notes (DPIIT-recognised startups only) or CCDs / CCPS instead.
• Income Tax: Treatment is uncertain. Amounts received from a resident may attract Section 56(2)(viib) (the 'angel tax') if not converted promptly to equity. From FY 2023-24, the angel tax was extended to non-residents (with carve-outs for specified excluded investors and DPIIT-recognised startups).
• Companies Act: Convertible securities must comply with Sections 42 (private placement) and 62 (rights / preferential allotment) on conversion — the SAFE itself is treated as 'application money pending allotment' or similar, and must be converted within 60 days to avoid being deemed deposits under Section 73.
• Accounting: Under Ind AS, SAFE is typically classified as equity if fixed-for-fixed conversion applies; otherwise as a financial liability with fair-value remeasurement.

Practical recommendation for Indian founders:

• For DPIIT-recognised startups, use the statutory convertible note framework (Rule 2(1)(c)(xvii) of Companies (Acceptance of Deposits) Rules; FEMA NDI Rules' specific Convertible Note carve-out).
• For other early-stage Indian companies, CCDs / CCPS with clear conversion mechanics are cleaner than SAFEs.