Fundraising & Investment

A SAFE — a simple agreement for future equity — is a contract under which an investor pays money now in exchange for shares to be issued at a future trigger event, usually the next priced round. Pakistan has no SAFE-specific statute; the instrument is enforceable as an ordinary contract under the Contract Act 1872, but its conversion mechanics must be mapped onto the share-issue procedures of the Companies Act 2017. As of mid-2026, SAFEs adapted from the common templates are widely used by Pakistani startups raising from local and foreign angels — the adaptation, not the template, is where the legal work sits.

Conversion is not automatic — it is a fresh allotment of shares that must follow the Companies Act 2017: board approval, member approval where the issue is other than by rights, allotment at the conversion price, a return of allotment filed with SECP, and an entry in the register of members. If the SAFE holder is a non-resident, the shares must be issued on a repatriable basis and reported to the State Bank through the company's bank. A well-drafted Pakistani SAFE spells out this mechanical sequence instead of assuming the shares simply appear.

A convertible note is debt: it carries principal, usually interest, and a maturity date, and it must be repaid if it never converts. A SAFE is not debt — it has no maturity or interest and either converts into shares or, in most forms, pays out only on defined exit events. In Pakistan the distinction has regulatory weight: debt from a foreign investor engages the State Bank's framework for foreign-currency borrowing, while a SAFE from the same investor is generally routed as equity investment.

It can, but foreign-currency borrowing by Pakistani companies is a regulated activity under the Foreign Exchange Regulation Act 1947 and the State Bank's Foreign Exchange Manual, and the loan must fit within the permitted categories and be routed and reported through the company's authorised dealer bank [CURRENT SBP LOAN CATEGORIES AND CONDITIONS — TO BE VERIFIED BY REVIEWING LAWYER]. This is why many cross-border early-stage deals in Pakistan are structured as SAFEs or direct equity rather than notes. Speak to the bank and counsel before signing, not after the wire arrives.

There is no general SECP approval for a private round — a private company raises from selected investors by private allotment, and what the law requires is process, not permission: member approval where shares are issued other than by rights under the Companies Act 2017, post-allotment filings, and an updated register of members. What a private company cannot do is invite the public to subscribe; a public offer is a different regime entirely. Getting the process right matters because defective allotments surface in every later round's diligence.

Most of a term sheet is deliberately non-binding — it records intent, subject to definitive documents — but under the Contract Act 1872 enforceability turns on what the document says, not what it is called. Market practice is to make specific clauses expressly binding: exclusivity, confidentiality, costs, and governing law. Founders should read the binding-terms clause before anything else, because an exclusivity period is a real legal restraint on talking to other investors.

The clauses that set economics and control for the life of the company: valuation and whether the ESOP pool sits in the pre-money, the liquidation preference multiple and whether it participates, the anti-dilution formula, board composition, the reserved-matters list, and any reset of founder vesting. These terms flow straight into the shareholders' agreement and are far cheaper to move at term-sheet stage than after diligence has run. Everything else is usually standard machinery.

Investor counsel will typically examine corporate records and SECP filings, whether the cap table matches the register of members, the chain of title to the company's IP, key customer and supplier contracts, employment and contractor documentation, regulatory registrations, litigation, and tax compliance. Findings do not just inform the price — they become conditions precedent, warranties and indemnities in the investment documents. The diligence list is, in effect, a preview of the risk allocation you are about to sign.

Build the data room before anyone asks for it: bring SECP filings current, reconcile every allotment and transfer against the register of members, collect signed IP assignments from every founder and contributor, gather executed contracts rather than final drafts, and document any equity ever promised. Fixing a known gap quietly before the round costs a fraction of fixing it under a term-sheet deadline with investor counsel watching. Most diligence delays trace to documents that were never signed, not deals that were never done.

Yes. Foreign equity investment is permitted in most sectors without prior government approval, and the Foreign Private Investment (Promotion and Protection) Act 1976 provides statutory protection, including for repatriation — subject to sector-specific caps and licensing regimes in areas such as banking and media. The conditions that matter in practice are procedural: the money must arrive through official banking channels and the shares must be issued on a repatriable basis under the State Bank's Foreign Exchange Manual, with the issue reported to SBP through the company's bank, as of mid-2026.

Because repatriation depends on it. A foreign investor's right to later remit dividends and sale proceeds out of Pakistan rests on the shares being held on a repatriable basis, which in turn requires a documented inward remittance — evidenced through the banking system — at the time of investment. Money that arrives in cash or through informal channels breaks that chain permanently, and it also creates tax and anti-money-laundering exposure for both sides.

Through the company's authorised dealer bank: dividends on repatriable shares are remittable subject to tax deduction and the bank's documentary requirements, and sale proceeds are remittable with supporting valuation and transfer documentation under the State Bank's Foreign Exchange Manual. The Foreign Private Investment (Promotion and Protection) Act 1976 guarantees repatriation as a matter of law; the practical timeline depends on documentation quality and prevailing foreign-exchange conditions, as of mid-2026. Sloppy paperwork at entry is the usual cause of pain at exit.

A flip into a Delaware, Singapore or ADGM holding company gives investors a familiar legal system, standard documents, and easier mechanics for future rounds and exits, with the Pakistani company becoming a subsidiary. For Pakistani resident founders the flip is not a formality: acquiring shares in a foreign company engages the Foreign Exchange Regulation Act 1947, under which residents need State Bank cover to hold foreign securities [CURRENT SBP FRAMEWORK FOR STARTUP HOLDING STRUCTURES — TO BE VERIFIED BY REVIEWING LAWYER]. Take advice before signing anything that assumes the flip is done.

Only within the State Bank's framework — under the Foreign Exchange Regulation Act 1947, a resident acquiring foreign securities is a regulated act, and routes exist through SBP permission and structured share-swap arrangements [CURRENT ROUTES AND CONDITIONS — TO BE VERIFIED BY REVIEWING LAWYER]. Holding foreign shares informally is the worst option: it creates foreign-exchange exposure and a tax problem, since foreign assets must be declared under the Income Tax Ordinance 2001. If a flip is on the table, the founders' side of it needs as much legal attention as the investor's.

Dilution is the drop in an existing shareholder's percentage when new shares are issued. The Companies Act 2017 gives procedural protection: further issues are ordinarily offered to existing members in proportion to their holdings first, unless the members approve an issue on another basis. That protects your right to participate, not your economics — protection against cheap issuances comes from contract, through pro-rata rights and anti-dilution clauses in the shareholders' agreement.

Anti-dilution rights adjust an investor's effective price — and therefore shareholding — if the company later issues shares at a lower valuation. The market norm is a broad-based weighted-average adjustment; a full ratchet reprices the investor's entire stake to the new low price and can devastate founder holdings in a down round. Because the adjustment is delivered through real share issuances under the Companies Act 2017, founders should model the cap-table outcome of the clause before signing, not when the down round arrives.

Yes, if built properly. A liquidation preference is normally a contractual waterfall in the shareholders' agreement, reinforced by issuing the investor a separate class of shares — the Companies Act 2017 permits different kinds and classes of shares with different rights — and by mirroring the terms in the articles. In a true statutory winding-up, distribution follows the insolvency rules, so preferences do most of their work in exits and acquisitions through 'deemed liquidation' definitions, which is exactly where the drafting deserves care.

Yes. The Companies Act 2017 allows a company to issue different kinds and classes of shares carrying different rights — to dividends, voting, conversion and priority on distribution — provided the capital structure is authorised by its memorandum and articles and there is authorised-capital headroom for the class. Institutional rounds in Pakistan commonly use preference shares to carry the investor's economic rights rather than leaving them purely contractual. The class rights, the articles and the shareholders' agreement must say the same thing.

Reserved matters are a list of decisions the company cannot take without investor consent — typically new share issues, borrowing above thresholds, changes to the business or budget, related-party transactions, and any sale of the company. At minority-protection level they are standard and reasonable; an overlong list turns every operational decision into a consent chase and can sit awkwardly with directors' statutory duties under the Companies Act 2017. Negotiate the list down to genuinely fundamental decisions with sensible thresholds.

Signing is the middle, not the end. A Pakistani closing typically runs: execution of the subscription and shareholders' agreements, satisfaction of conditions precedent, receipt of funds — through banking channels, on a repatriable basis for foreign investors — board and member resolutions, allotment of shares, a return of allotment filed with SECP, the register of members updated, and amended articles filed where the deal requires them. Reporting to the State Bank through the company's bank completes the picture for foreign shareholders. Until the filings are done, the round is not really closed.