Industry
Startups
Counsel for Pakistani founders from SECP incorporation through the first priced round — the paper that decides whether the company survives its own growth.
A Pakistani startup is legally easy to start and legally easy to ruin. The starting part has genuinely improved: as of mid-2026, SECP's online process reserves a name and incorporates a private company in days, with fees that are trivial next to what founders spend on a laptop. What has not changed is everything the certificate of incorporation switches on. The Companies Act 2017 does not know the company is two people in a co-working space. It expects an auditor appointed within the statutory window unless the company sits below the audit-exemption threshold, statutory registers maintained, every change of director and every share issue filed within the prescribed period, and an annual return each year. None of these steps is difficult. All of them are invisible to a founder shipping product, and each missed one is recorded against the company permanently.
The compliance debt trap
We call the result compliance debt because it behaves like debt: it is painless to take on, it compounds, and it falls due at the worst moment. The typical pattern is a company that incorporated eighteen months ago, opened a bank account, started billing — and filed nothing since. Add an FBR registration completed for the wrong business activity, a Punjab Revenue Authority registration never made despite taxable services, and employees paid without contracts or withholding, and the company has quietly accumulated a diligence file that reads worse than the business is. Investors do not usually walk over compliance debt. They reprice it — through conditions precedent, holdbacks, expanded warranties, and founder indemnities. The cure is cheap and boring: a filing calendar, a designated officer, and a quarterly review. We build that machinery at incorporation, because retrofitting it costs a multiple.
Founder paper before investor paper
The most expensive disputes we see in this industry are not with investors. They are between founders, and they follow a script: an equal split agreed at the start, no vesting, and a departure in year two. Pakistani company law is unhelpful to the founders who stayed. A private company cannot simply repurchase the leaver's shares, and the articles most incorporation agents file contain no transfer restrictions worth the name. So the recovery mechanics have to be contractual and in place from day one — reverse vesting implemented through call options in favour of the continuing founders, good-leaver and bad-leaver definitions, drag and tag provisions, and articles amended to match the shareholders' agreement rather than contradict it. We insist on this paper before the first external money, because every investor's lawyer will insist on it anyway, on the investor's terms.
SAFEs, options, and the cap table
Early-stage money in Pakistan increasingly arrives on SAFEs and convertible notes, and the instruments are usually downloaded rather than drafted. The problem is not the commercial logic — discounts and valuation caps translate fine. The problem is conversion. A Pakistani private company issues new shares through the further-issue procedure of the Companies Act 2017, with the approvals and pre-emption mechanics that procedure carries, and at a par value the standard SAFE never contemplates. A conversion that has not been engineered against those mechanics produces a stand-off at the priced round, which is the one moment the company cannot afford one. The same discipline applies to foreign investors: shares issued to non-residents are reported through an authorized dealer under the State Bank's framework, which as of mid-2026 is what protects the investor's right to take dividends and sale proceeds out. Skipping that reporting saves a week and costs an exit.
Employee options carry a parallel set of traps. For public companies a dedicated SECP-approved scheme route exists under rules dating from 2001 [APPLICATION TO PRIVATE COMPANIES — TO BE VERIFIED BY REVIEWING LAWYER]; private startups in practice build option schemes contractually, reserve the pool on the cap table, and issue shares at exercise through the statutory procedure. The tax point matters as much as the corporate mechanics: section 14 of the Income Tax Ordinance 2001 taxes the employee at exercise on the spread, as salary, which shapes when employees should exercise and how the scheme should define restrictions on transfer. An option pool designed without the tax answer is a retention tool that punishes the people it was meant to keep.
How we work with startups
We run startup engagements against runway, not against a law firm's instinct for completeness. Formation, founder agreements, IP assignment into the company, and the filing calendar come first, because they are cheap now and ruinous later. Fundraising instruments are adapted to Pakistani mechanics before signature, not litigated after. Where a foreign holding structure is genuinely required, we obtain the State Bank approvals under FERA 1947 rather than deferring the question. And before every round, we run the diligence an investor will run — on the registry file, the tax registrations, and the employment paper — so the founders read the findings before anyone else does. Everything above is stated as of mid-2026; the statutory thresholds and SECP procedures move, and we confirm the current position at the start of each engagement.
The Five Recurring Problems
The problems this sector keeps producing.
- 01
Compliance debt that surfaces in diligence
Incorporation takes days; the obligations it triggers run for the life of the company. Missed annual returns, unfiled director changes, an auditor never appointed, and tax registrations never completed accumulate quietly for two years. Then an investor's lawyers find all of it at once, mid-round, and the term sheet acquires conditions.
- 02
Founder equity with nothing in writing
Equal splits agreed in conversation, no vesting, no leaver terms, no transfer restrictions in the articles. When a co-founder leaves in year two holding forty percent, the Companies Act 2017 gives a private company no clean self-help route to recover the shares. Whatever recovery exists has to have been written at the start.
- 03
SAFEs drafted for another legal system
The standard Silicon Valley SAFE assumes instruments and conversion mechanics that Pakistani company law does not natively provide. Signed unmodified by a Pakistani private company, it can promise shares that cannot be issued the way the document assumes — the further-issue procedure, par value, and shareholder approvals all get in the way at conversion.
- 04
Option promises without an option scheme
Offer letters promise equity; no scheme, no pool, and no approvals exist behind the promise. The company discovers this when a key employee resigns and asks what exactly they own. Tax then arrives at exercise under section 14 of the Income Tax Ordinance 2001, on a spread nobody planned for.
- 05
The offshore flip done without approval
An accelerator or lead investor asks for a Delaware or ADGM holding company, and founders swap their shares up without State Bank approval under the Foreign Exchange Regulation Act 1947. The defect does not stop the flip from happening. It surfaces at exit, when the money needs to move and cannot.
The Regulators That Matter
Who you answer to — and for what.
- SECP
- Registers the company under the Companies Act 2017 and receives every statutory filing after that — annual returns, director changes, share issues, and charges. Most startup compliance debt is owed here.
- State Bank of Pakistan
- Controls the exchange side of the cap table: reporting of shares issued to foreign investors, repatriation of their proceeds, and approval for residents holding shares in companies abroad under FERA 1947.
- FBR
- National tax number registration, employer withholding, and the treatment of founder transfers and employee options under the Income Tax Ordinance 2001.
- Punjab Revenue Authority
- Sales tax on services for Punjab-based companies under the Punjab Sales Tax on Services Act 2012. The registration obligation arrives earlier than most founders expect.
Mapped Services
The practices this industry draws on.
- Startup Law The core discipline — formation, founder arrangements, and the sequencing of legal work against runway.
- Fundraising & Investment SAFEs, convertible notes, and priced rounds documented so they actually convert under Pakistani company law.
- SECP Advisory Incorporation done properly and the filing calendar kept, so diligence finds a clean registry file.
- Employment Law Contracts, confidentiality, and IP assignment for the first hires — before a departure makes them urgent.
- IP Protection The name, the code, and the brand secured while they are still cheap to secure.
- Commercial Contracts Customer and vendor paper that survives the company's first real dispute.
Questions, Answered
What clients in this industry ask.
Name reservation and incorporation through SECP's online system are usually measured in days, as of mid-2026. The real timeline is what follows: bank account opening, FBR registration, provincial sales tax registration where the business needs it, and the first statutory appointments. We treat incorporation as a two-to-four-week project, not a filing.
Yes, precisely because you are friends. The agreement exists for the day circumstances change — vesting, leaver terms, transfer restrictions, and deadlock provisions cost little to write on day one and are close to impossible to negotiate after a falling-out. It is the cheapest document the company will ever sign.
Not unmodified. Conversion mechanics, par value, and the further-issue procedure under the Companies Act 2017 need Pakistan-specific drafting, and shares issued to foreign investors must be reported through an authorized dealer to the State Bank to protect repatriation. We either adapt the instrument or move it to a holding-company level where one exists.
Usually through a board- and shareholder-approved option scheme, with shares issued at exercise under the Companies Act 2017 procedure. The tax point falls at exercise under section 14 of the Income Tax Ordinance 2001, on the difference between market value and what the employee pays. Phantom units are the fallback where issuing real shares is impractical.
Fixable, and much better fixed before an investor finds it. Late filings carry additional fees and can create director-level defaults, but the registry can be brought current through a deliberate reconstruction of the filing history. We do this routinely in the months before a round.
Only when a specific investor or program genuinely requires it, and only with State Bank approval under FERA 1947 — an unapproved flip is a defect that compounds until exit. Where possible we keep the Pakistani company directly investable; the framework for foreign investment into Pakistan is more workable than founders assume.
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Prepared by The First Counsel · As of 2026-07-12 · Pending professional review — statements flagged in the text are being verified
This publication is provided for general information only. It is not legal advice, and neither reading it nor corresponding with the firm about it creates a lawyer–client relationship. The position stated must be verified against current law before it is relied upon.