Can an investor fund a startup through a SAFE agreement in Pakistan?

A startup may consider an investment structured through a Simple Agreement for Future Equity, commonly called a SAFE, but a US-style template should not be signed in Pakistan without adapting it to the Companies Act, 2017, the company's capital structure and, where foreign investment is involved, exchange-control requirements. A SAFE is ordinarily intended to provide a contractual right to receive equity upon a future financing or other defined event. Its name does not create an automatic exemption from Pakistani securities or company-law rules.

The central legal issue is whether the parties have created a future contractual obligation, a presently issued security, a debt instrument with conversion rights or another arrangement. That classification can affect authority, issuance procedure, accounting, regulatory permissions, tax and enforceability. A document marketed as a SAFE may use definitions that do not match the company's share capital or applicable Pakistani procedural mechanisms.

Understand the economic bargain before legal drafting

A typical SAFE provides money now in exchange for a future equity entitlement determined by a valuation cap, discount or conversion mechanism. The investor may not receive shares immediately. Conversion commonly depends on a later priced equity round, liquidity event or termination scenario, but the actual rights are entirely a function of the document and applicable law.

The founder should model what happens if the next round occurs at a higher or lower valuation, if multiple SAFEs are outstanding or if no subsequent round occurs. A headline investment of Rs. 10 million does not tell the parties what percentage will ultimately be issued. Economic modelling should precede documentation.

Classify the instrument under Pakistani law

The Companies Act, 2017 regulates company capital and the issue of shares. Contractual promises to issue future shares must be capable of lawful performance through the applicable authorisations, approvals and filings. A foreign template may assume a stock class or preferred-share rights that do not exist in the company's articles.

Counsel should determine whether the instrument is correctly characterised as a contract for future equity, a convertible debt security or another form of financial arrangement. Labelling an obligation as 'non-debt' is relevant but not conclusive if the actual terms promise repayment or interest-like returns. Regulatory consequences turn on legal substance.

Shareholder approval and pre-emption rights

The company's existing articles, shareholder agreement and the Companies Act may regulate new share issues and rights of existing members. Founders must check whether pre-emption rights apply, whether valid waivers or approvals are necessary and how the price and conversion mechanics fit the authorised corporate process.

A contract requiring the company to issue shares on terms it is not legally authorised to perform creates avoidable exposure. Before signing, the business should prepare a board approval, examine shareholder consents and model the resulting capital table at each contractual trigger.

Valuation caps, discounts and conversion mathematics

A valuation cap effectively sets an upper reference for the price used to calculate the investor's equity entitlement. A discount may reduce the conversion price relative to a future priced round. Where both operate, the contract must state the correct ordering, treatment of pre-money or post-money calculation and fully diluted capital.

Definitions of 'company capitalisation', option pool, convertible instruments and qualifying financing are essential. Two documents using apparently similar caps can generate materially different dilution. The investor and founders should review worked examples attached to the agreement rather than rely on an informal statement about expected ownership.

What if no priced funding round occurs?

A SAFE may remain outstanding for years if the conversion trigger never happens. The contract should address whether there is a maturity date, any ability to terminate, treatment on dissolution and the investor's rights on sale of the company. If there is no repayment right, the investor should understand the risk of losing the contribution without ever receiving equity.

A startup should also consider how the instrument appears in financial statements and during future due diligence. Another investor may require existing SAFEs to convert or be amended before a round closes. Vague conversion terms can delay a transaction precisely when rapid execution is commercially important.

Investor rights before conversion

The parties may negotiate information access, participation in future rounds, most-favoured-nation treatment or limited restrictions on major corporate actions. These rights should be defined carefully. The investor should not assume it has statutory voting rights as a shareholder before shares are lawfully issued unless another recognised basis applies.

Founders should avoid granting extensive vetoes to numerous early SAFE investors, as those contractual constraints may undermine later governance. Material investor protections can sometimes be addressed more coherently at the priced-equity stage when the class of shares and definitive shareholders' agreement are established.

Foreign investment and SBP requirements

If the investor is non-resident, the company must examine the foreign-exchange framework, the method of receipt through authorised banking channels, treatment of securities issued on a repatriable basis and any applicable reporting. The SBP Foreign Exchange Manual addresses securities and foreign investments, and SBP has issued specific directions facilitating certain convertible debt funding for qualifying startups.

Those instructions should not be presumed to validate every foreign SAFE automatically. A pure future-equity instrument may not fall within the same regulatory classification as convertible debt. Obtain advice from the designated authorised dealer and confirm the permissible structure before transferring funds, promising conversion or assuring the investor of unrestricted repatriation.

Tax and accounting questions

The parties should assess accounting recognition of the contribution, the impact of conversion, withholding obligations where relevant and tax consequences of subsequent disposals. A SAFE's financial-reporting classification may differ depending on whether it is an equity instrument, liability or contains repayment features under the applicable standards.

A private company's tax and company records should agree on the actual transaction. The founder should not describe the investment as a bank loan to one authority and as irrevocable share capital to another without a coherent legal basis.

Documents accompanying the SAFE

A suitable transaction package may include board and shareholder approvals, a compliant SAFE or alternative instrument, investor identification documents, beneficial-ownership information, statutory registers, a current cap table and any banking correspondence required for cross-border investment. Material existing investor rights should be disclosed.

The startup must also ensure its business and intellectual-property ownership are properly documented. A SAFE does not cure a defect in ownership of software, a lack of sector licence or unresolved founder share transfers. A competent investor will evaluate these matters alongside the proposed conversion rights.

Practical example of a seed investment

Suppose a Pakistani technology company seeks USD 200,000 from a foreign angel investor through a document adapted from a US accelerator. The form promises automatic preferred shares at the next priced round, refers to an authorised capital model that the company does not use and contains no banking analysis. The parties cannot safely assume signing and receipt of funds creates a valid future share entitlement.

They should identify an appropriate legally recognisable instrument, adapt conversion mechanics, obtain corporate authority and confirm the applicable foreign-exchange route. A tailored convertible arrangement may be more suitable in some cases, but its regulatory conditions must be satisfied rather than assumed.

Opinion and recommended course

A SAFE is not categorically impossible in Pakistan, but neither is a foreign precedent automatically enforceable or compliant. Its economics, legal character, share-issuance obligations and foreign-exchange treatment require careful alignment with Pakistani law. The startup should obtain proper approvals and a fully diluted conversion model before receiving funds.

For foreign investors, confirm the route with counsel and an authorised dealer under the current SBP instructions. For domestic investors, focus on shareholder rights, lawful future issuance and treatment of an unresolved instrument. The appropriate structure is the one that is legally executable, commercially intelligible and credible to the next funding round.

Principal authorities for verification: Companies Act, 2017 and applicable further-issue-of-capital provisions; Companies Regulations, 2024; Contract Act, 1872; SBP Foreign Exchange Manual, particularly chapters 19 and 20 as applicable; SBP's startup convertible-debt circulars and current authorised-dealer instructions.