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COMING BACK TO iSAFE

 

iSAFE drafters have tried to incorporate SAFE identical concepts and terminologies in their document and they claim it to be even safer document and secure investment route as a legally recognized security instrument in India i.e. CCPS. However, the risks that are associated with any original SAFE document can neither be addressed nor mitigated through this Indian adaptation of SAFE. The real and actual risks associated with these documents are not with respect to their form and nature or the nature of securities issued under them, BUT the risk at the end of Seed Stage Startups of not understanding the nitty-gritties, concepts, conversion formulas, definitions, rights, privileges, preferences and restrictions covered in these documents. Seed stage investors claim iSAFE to be a 'STANDARD' and 'INDUSTRY ACCEPTED' document.

VISIBILITY OF iSAFE ON CAP TABLES

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It can be said that the Indian document iSAFE addresses a major issue that rides with the original SAFE that is the non-visibility or non-fungibility of the SAFE investment  on the Cap Table of the company. iSAFE drafters claim that  this issue is entirely addressed "as the iSAFE notes take the form of legally recognized instrument in India i.e. Compulsorily Convertible Preference Shares (CCPC) and therefore any investment through iSAFE sequel notes is recognized and visible on the Cap Table of the company. While this may seem strikingly beneficial for the investor, it hardly makes any difference in terms of enforceability and maintainability of either the SAFE in its original form on one hand or the iSAFE i.e. agreement for issuance of CCPS. 

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CAN SAFE DOCUMENT BE IMPLEMENTED IN INDIA?

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There is much ambiguity for a definitive answer to this question. Especially when SAFE adaptations are fairly new to India and the Indian regulators. There are a lot of apprehensions on the legality, recognition and enforceability of the SAFE document if implemented in India. Some may argue that since a SAFE is neither a 'Equity Instrument', a 'Security or Debt instrument'', 'Convertible Note' or other, the SAFE holder will have no downside protection over their SAFE investments. From the startup investee company standpoint, the SAFE investment can never force a startup to recognize the SAFE investment amount in their books and disclosure as 'Debt'. This was the entire idea and charm of a Simple Agreement for Future Equity, that is, to raise money at seed stage when no definitive value can be ascertained for a startup idea and convert the amount into equity or preferred stock in the event of a priced equity round or a Series A. 

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POSSIBLE MODE OF IMPLEMENTATION OF SAFE DOCUMENT

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SAFE document in its form can be seen as a shorter and standardized form of an SSA (Share Subscription Agreement) with a contingent 'closing date' and no expiry. Entire investment amount can be considered as advance sale consideration paid upfront to the idea stage startup and this contingent SSA can be enforced like any other agreement to perform certain obligations. Admittedly in the event of a dispute, the investment amount may not be seen by the courts as 'Debt' but the obligations relating conversion, cash-out, liquidation and pro-rata dilution may still be enforceable like any other contract, SSA/SHA or SSSHA. From a commercial and investor point of view, such high risk investments are never thought of as Debt at the time of investment. 

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FUTURE OF iSAFE IN INDIA

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A lot of deliberations sensitization over this topic is required in India at the founder and entrepreneurial level. It would be totally incorrect to say that the iSAFE document is going to obviate the need of long agreements viz. SHA (Share Holder Agreements), or that it dispenses the need for corporate legal review by a competent and domain expert lawyer, or that the terms of iSAFE are outrightly favourable for entrepreneurs.