Practice Area
Startup Law
We take startups from incorporation through fundraising — founder arrangements, ESOPs, SAFEs and convertibles, priced rounds, and the SECP and State Bank mechanics that make foreign money work in a Pakistani company. We act for founders and for the investors who back them.
Startup lawyering is ordinary company and contract law applied under time pressure to a business that changes shape every year. Pakistan has no separate startup statute; a startup is a private company under the Companies Act 2017, funded through instruments the Act was not drafted with in mind, often by investors sitting outside the exchange-control perimeter of the Foreign Exchange Regulation Act 1947. The craft is making the standard global instruments — SAFEs, convertibles, preference shares, ESOPs — function correctly inside that framework, so that what the term sheet promises is what the company can lawfully deliver.
The work divides into three phases. First, formation: vehicle choice, founder equity with vesting and leaver terms, IP assignment into the company, and articles that will not need rewriting at the first round. Second, fundraising: instrument design and negotiation, the SECP approvals and filings of each issue, and the State Bank reporting that keeps foreign money repatriable. Third, growth housekeeping: ESOP operation, covenant compliance under investment agreements, and keeping the cap table and statutory record identical — which they frequently are not.
Our bias is toward the small number of documents that actually decide outcomes. A startup does not need a large legal spend; it needs vesting, IP assignment, a clean instrument per raise, and a filing record that matches the cap table. Almost every expensive startup legal problem we see — the departed founder with a frozen third of the company, the SAFEs that cannot be reconciled at the priced round, the investment invisible to the State Bank at exit — traces to one of those four being skipped in a busy month.
We work on both sides of the table. For funds and angels we run diligence and documentation on Pakistani targets; for founders we negotiate against those same documents. Knowing what the other side's checklist says is most of the negotiation.
The positions on this page are stated as of mid-2026. The startup tax regime, State Bank procedures and SECP regulations are all amended frequently — often by annual Finance Act — and must be confirmed at the time of the round. Nothing here is advice on a specific raise or structure.
When Businesses Need This
The moments this practice exists for.
- 01You are incorporating with co-founders and about to split equity equally, with no vesting and no plan for what happens when one of you leaves.
- 02An angel has offered your first cheque on a SAFE downloaded from the internet, and nobody has checked how it converts inside a Pakistani private company.
- 03You have promised early hires equity and need an ESOP that is real — a pool, grant documents and a mechanism — not a line in an offer letter.
- 04A foreign fund's term sheet requires a holding company in Delaware, Singapore or the DIFC, and you need the flip structured and taxed before you agree to it.
- 05A VC term sheet has arrived with preference shares, a board seat and vetoes, and you are negotiating against people who do this every month.
- 06An accelerator's paperwork gives it equity and rights that will sit on your cap table at every future round.
- 07A founder is leaving, owns a third of the company, and the documents say nothing about what happens next.
How It Works
The process, stage by stage.
1
Structuring call
One session on where the company is and where the money will come from: local or foreign investors, revenue in Pakistan or abroad, and whether a foreign holding company is genuinely needed now or is a later problem. Structure follows the capital plan; changing it after the first round is expensive.
2
Founder documents
We put the founder arrangements in writing while everyone is still friends: shareholding, vesting and leaver terms, roles, IP assignment into the company, and deadlock and exit provisions in the articles and a shareholders' agreement that actually work under the Companies Act 2017.
3
Investment instruments
For each raise we draft or review the instrument — SAFE, convertible note or subscription and shareholders' agreement — and translate it into steps a Pakistani company can lawfully take: authorised capital headroom, the further-issue procedure, and conversion mechanics that will function when the next round prices.
4
SECP and State Bank execution
We run the regulatory path of the round: board and shareholder approvals, filings with the registrar, and for foreign investors, remittance through the banking channel and reporting to the State Bank through the authorised dealer bank, so the shares issue cleanly and the money can one day leave the way it came in.
5
Post-closing housekeeping
After the round we true up the record — registers, cap table, filings, ESOP grants — and give the company a short list of the covenants it just signed and the consents it now needs for future decisions. Most breaches of investment agreements happen because nobody kept the list.
The Legal Framework
The law this work runs on.
- Companies Act, 2017
- Governs the private limited company most startups use — share classes, further issues, transfers, board and shareholder decision-making, and the limits (including the ceiling on private company members and the bar on offering shares to the public) inside which every startup structure must fit.
- Companies (Further Issue of Shares) Regulations, 2020
- The route for issuing new shares to investors, including issues otherwise than by rights and preference shares. SAFE and note conversions ultimately land here — an instrument that promises shares the company cannot lawfully issue by this route is a problem deferred to the worst moment.
- Foreign Exchange Regulation Act, 1947 and the State Bank's Foreign Exchange Manual
- Foreign subscription money must arrive through the banking channel and the share issuance must be reported through the authorised dealer bank under the Manual's securities chapter [PROCEDURE AND CURRENT CIRCULARS TO BE VERIFIED BY REVIEWING LAWYER]. This paperwork is what supports repatriation of dividends and exit proceeds later; missing it at seed stage surfaces at the exit.
- Income Tax Ordinance, 2001
- Contains the startup regime — the definition in section 2(62A) tied to Pakistan Software Export Board registration and a time-limited tax exemption for qualifying startups under the Second Schedule [CLAUSE AND CURRENT SCOPE TO BE VERIFIED BY REVIEWING LAWYER] — and the reduced final tax treatment for registered IT and IT-enabled export income, as in force in mid-2026. Round structures and flips both have tax consequences that should be priced before signing.
- Public Companies (Employees Stock Option Scheme) Rules, 2001
- The codified ESOP regime applies to public companies. Private companies build ESOPs contractually — a pool created in the capital structure, scheme rules, grant letters and vesting — within the Companies Act 2017 machinery, which is workable but has to be deliberately constructed.
- Private Fund Regulations, 2015
- SECP's regime for private equity and venture capital funds. Knowing how a licensed local fund is regulated explains much of what it asks for in diligence and documentation, and matters when structuring vehicles for local investors.
- Contract Act, 1872
- Section 27 voids most post-exit non-competes against departing founders and employees. Protection of the startup's real assets runs through confidentiality, IP assignment and well-drafted vesting and leaver terms instead.
- Trade Marks Ordinance, 2001
- Brand registration before the Intellectual Property Organization of Pakistan. Investors expect the name and logo to be registered or applied for by the time of a priced round; the filing is inexpensive and the diligence question is certain.
Statutory references are stated as of the page’s as-of date and flagged where verification is pending; the law moves, and the current position should be confirmed before relying on it.
Common Mistakes
The errors we see most — and their price.
- Splitting equity equally on day one with no vesting, so a founder who leaves in month six keeps a quarter of the company forever.
- Signing a US-form SAFE without adapting it — the discount and cap mathematics assume corporate machinery that a Pakistani private company must replicate deliberately through its authorised capital and the further-issue procedure.
- Leaving the IP in personal names: code written before incorporation, designs from freelancers with no assignment, and a brand registered to a founder rather than the company.
- Taking foreign money as informal personal transfers instead of documented subscription through the banking channel, then discovering at exit that the investment was never on the State Bank record.
- Promising employees percentages in offer letters with no pool, no scheme rules and no grant documents — a stack of unquantified claims that surfaces in every diligence.
- Flipping to a foreign holding company because a template demanded it, without tax advice on the share swap or a plan for the two-company overhead that follows.
- Raising small amounts from dozens of acquaintances without checking the line between a private placement and an offer to the public regulated under the Securities Act 2015.
- Classifying the whole early team as contractors to save cost, and building an employment-law liability that reprices in diligence.
Representative Scenarios
The shape of the work.
Illustrative scenarios, not case reports — composites drawn to show how matters of this kind run.
- —Illustrative: three founders split a company equally with no vesting. One left after eight months and refused to transfer anything. Two funding rounds later, a third of the company belonged to someone who had not worked in it for years, and the Series A closed only after an expensive buy-out the documents could have made automatic.Illustrative
- —Illustrative: a startup raised on three differently worded SAFEs across two years. At the priced round, the instruments produced three different conversion prices and one investor whose cap arithmetic nobody could reproduce. The round paused for six weeks while the instruments were renegotiated.Illustrative
- —Illustrative: a foreign fund's diligence found that a SaaS company's core product had been built by a co-founder before incorporation and partly by freelancers, with no assignments. The fix was signatures and filings, but the fund repriced the round for the risk it had found.Illustrative
- —Illustrative: an overseas angel had sent money through a relative's account for speed. At acquisition four years later, the buyer's counsel could not trace the investment through the banking channel, and the angel's exit proceeds waited on a remediation exercise with the bank.Illustrative
Questions, Answered
What clients ask about startup law.
Yes, as a contract — but it has to be adapted. A SAFE is a promise of future shares, and a Pakistani private company delivers on that promise through the Companies Act 2017 and the further-issue regulations: authorised capital headroom, the correct approvals, and conversion mechanics drafted to work inside that procedure. We keep the commercial terms founders and investors expect and rebuild the machinery underneath them.
In most sectors there is no prior approval requirement for equity investment as of mid-2026 — what there is instead is process. The money must come through banking channels, the share issue must be reported to the State Bank through the company's authorised dealer bank, and repatriation of dividends and sale proceeds later depends on that record existing. The process is manageable; skipping it is the expensive option.
The codified ESOP rules apply to public companies, so a private company builds its plan contractually: a defined pool, scheme rules covering vesting, leavers and exercise, board approvals, and grant letters that tie back to real authorised capital. Done properly it is a genuine incentive; done as a line in offer letters it is a diligence problem. Tax treatment of options for employees should be checked against the Income Tax Ordinance 2001 at design time.
Only if the capital you are actually raising requires it. Some foreign funds invest only through foreign holding structures; others invest directly into Pakistani companies. A flip adds a share swap with tax consequences, a second company to run, and transfer pricing between the two. Our advice is usually to flip when a term sheet demands it, not before — and to structure the Pakistani company from day one so a later flip is clean.
The Income Tax Ordinance 2001 defines a startup by reference to Pakistan Software Export Board certification and business criteria in section 2(62A), and grants qualifying startups a time-limited exemption under the Second Schedule; separately, registered IT and IT-enabled service exports enjoy a reduced final tax regime, as of mid-2026. The definitions are narrower than the word startup suggests, and Finance Acts adjust them almost yearly, so we confirm the current position before anyone builds it into a model.
SAFEs and notes defer valuation and are cheaper to close, which suits small early cheques; a priced round sets the valuation and full shareholder terms, which investors want by the time the amounts justify the cost. In Pakistan, notes add a wrinkle: they are debt, which raises its own regulatory and tax questions, particularly with foreign lenders. For most early raises we see, an adapted SAFE or a simple priced round is the practical field.
Yes — through a small grant of shares or options with vesting tied to actual involvement, documented like any other issue. The mistakes are informality and generosity: undocumented promises that surface in diligence, and advisor stakes that look large to every later investor. A written advisor agreement with a modest, vesting grant and clear IP and confidentiality terms is the standard we draft to.
For an early-stage Pakistani company, reliably: incorporation record and filings, cap table against the members' register, IP assignment into the company from founders, employees and freelancers, founder vesting, key contracts and any regulatory licences, tax registration and compliance, and how earlier money came in — instruments and banking channel. Most of that list can be made clean in advance for a fraction of what it costs to fix mid-round.
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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.