When Indian startup founders expand globally, they often create a U.S. company to access international investors. However, due to RBI regulations, Indian individuals are not allowed to directly own overseas companies beyond certain limits. To comply, founders typically set up an Indian entity that owns the U.S. company, a structure that requires RBI approval through the Overseas Direct Investment (ODI) process.
The ODI process, while necessary, can take several months to complete. During that time, founders often ask: “Can we start raising money into our U.S. company even though the ODI isn’t done yet?” Until recently, the answer was “no.” But with expert guidance and the right legal structures, particularly using SAFE notes, this is now possible. This article explains how Indian founders can raise investment before ODI completion, without breaking compliance rules or affecting the valuation of their U.S. company.
Understanding ODI and Why It Delayed Fundraising
ODI (Overseas Direct Investment) is the framework under which Indian residents/entities invest in foreign companies. In practice, ODI involves working with an authorized bank, filing forms, obtaining a Unique Identification Number (UIN) for your investment, and adhering to strict timelines and caps. These requirements meant founders often had to wait for ODI compliance to finish before raising money, to avoid breaching any rules. The need to finalize paperwork with the RBI made the process lengthy – by the time all was done, months could pass, potentially causing startups to miss fundraising windows.
In short, the ODI process historically created a fundraising freeze: you couldn’t easily take on new investors in your freshly incorporated U.S. company until all the RBI formalities were completed. This was a frustrating catch-22 for founders who had interested investors ready to commit. The good news is that recent guidance from our experts has introduced some flexibility for unpriced rounds, which we’ll explore below.
What is a SAFE (Simple Agreement for Future Equity)?
If you’re unfamiliar with SAFEs, here’s a quick primer in founder-friendly terms. A SAFE is a short agreement (typically a few pages) where an investor gives you money now in exchange for a promise of future equity. In other words, the investor will get shares later – usually when you next raise a formal equity round – rather than immediately. The SAFE itself is not a loan or a share, but a convertible instrument that turns into equity down the road. Unlike convertible notes, SAFEs have no interest rate and no maturity date – there’s no debt to repay and no ticking clock.
Think of a SAFE as a handshake today for a slice of the company tomorrow: the investor trusts your startup’s potential, so they give funding upfront and delay the exact pricing of their equity until a later stage. No immediate valuation is set when issuing a SAFE. This makes SAFEs much quicker and simpler to execute than a traditional equity round. You don’t need to negotiate a detailed valuation or terms like liquidation preferences at the seed idea stage. Instead, the SAFE typically includes a valuation cap (an upper limit on price for the future shares) or a discount for when it converts, aligning investor and founder expectations without heavy legal complexity.
In summary, SAFEs offer a fast, founder-friendly and compliant way to raise seed money. They convert to preferred stock when a priced round eventually happens, but until that conversion, the SAFE holders are not shareholders and generally don’t have voting rights or board seats. This simplicity is exactly why SAFEs have become a standard in startup fundraising globally – and now they’re proving useful in the ODI context too.
SAFE vs. Priced Rounds
| Feature | SAFE (Unpriced Round) | Priced Round (with Preference Shares) |
|---|---|---|
| Valuation Set at Investment? | No – valuation is deferred to a future round | Yes – valuation is negotiated and fixed upfront |
| Shares Issued Immediately? | No – investors receive equity only when SAFE converts | Yes – preference shares are issued immediately to investors |
| Creates a New Share Class? | No – no share class is created at SAFE stage | Yes – usually involves creating a new preferred share class |
| Legal Complexity & Cost | Low – simple agreement, minimal negotiation | High – requires term sheets, share issuance, and regulatory filings |
| Timeline to Close | Fast – can close in days | Slower – often takes weeks due to diligence and documentation |
| Triggers ODI Complications? | No – no valuation change or ownership impact during ODI | Yes – changes valuation and ownership, which must be declared in ODI filings |
| Investor Ownership Certainty | Deferred – ownership percentage is determined when SAFE converts | Immediate – investors receive equity with defined rights (e.g., liquidation preference) |
| Recommended During ODI? | Yes – allows compliant fundraising during ODI process | No – can interfere with ODI approvals and RBI compliance |
Priced Round
In a priced equity round, the company’s valuation is determined at the time of investment. Investors exchange cash for immediate equity, typically in the form of preference shares. These shares come with specific rights, such as liquidation preferences, anti-dilution protections, and sometimes board representation, making them more attractive than common shares.
Because investors receive their equity upfront, priced rounds require more extensive legal and financial processes. This includes negotiating valuation and terms, issuing a new class of shares (the preferred stock), updating the cap table, and filing all regulatory paperwork. While this gives investors certainty about their ownership and rights from day one, it also means higher legal costs, more negotiation, and a longer timeline to close the round. For Indian founders going through the ODI process, this structure can create compliance issues. A priced round, by altering the company’s ownership and establishing a formal valuation, can conflict with the requirements of the ODI filing, which is based on an earlier valuation and shareholding structure. That’s why raising investment through a priced round is not recommended until the ODI process is fully completed.
SAFE (Unpriced Round)
In an unpriced round using a SAFE or similar convertible instrument, you do not set a present valuation for the company. Investors do not receive shares right away for their money. Instead, they get the right to future shares once a priced round occurs. This means no new share class is created now, and you avoid negotiating complex terms at an early stage. Legally, it’s a simple contract – fewer negotiations, lower legal fees, and faster closing of the deal.
The trade-off is that the exact ownership % the investor will get is determined later, when the SAFE converts. Instead, many founders opt to raise capital through a SAFE, which defers the issuance of preference shares to a later stage. Once the ODI process is complete and the company is ready for a formal priced round, the SAFE converts into those same preference shares, providing investors with the rights they expect, but without triggering valuation or compliance problems prematurely.
Why does this difference matter during ODI? Because SAFEs (unpriced rounds) and priced rounds trigger different regulatory implications. This is exactly why the new approach focuses on SAFEs as a bridge to raise funds before the ODI is fully complete, while avoiding the pitfalls of an early priced round.
Can a startup raise investment while the ODI process is underway?
Yes, based on recent legal and structuring advice, it is entirely possible for a startup to raise capital during the ODI (Overseas Direct Investment) process by using a SAFE (Simple Agreement for Future Equity). The primary reason this is permissible is that a SAFE does not assign or change the valuation of the U.S. entity at the time the investment is made.
This distinction is critical because ODI filings generally require Indian founders to report the valuation of the foreign (typically U.S.-based) entity when making their investment. If that valuation changes significantly, such as through a priced equity round, it can create complications or even invalidate the original ODI application.
A SAFE, however, is considered an “unpriced” instrument. It does not immediately set a company valuation or issue shares. Instead, it postpones valuation to a future financing round. Because no shares are issued and the ownership structure remains unchanged at the time of signing a SAFE, the founders’ stake is unaffected during the ODI process.
As a result, Indian founders can legally accept investment into their U.S. startup through a SAFE, even while the ODI approval is still pending, without violating compliance regulations.
Just a few years ago, this option was not clearly available. But with evolving regulatory clarity and the support of legal experts, using SAFEs as a temporary financing tool during ODI is now a widely accepted and compliant approach. This allows Indian founders to continue raising funds and maintaining momentum without having to wait for the full ODI process to conclude.
Only for Unpriced Rounds (Not Priced Equity or Preference Shares)
It’s crucial to emphasize that this workaround applies only to unpriced rounds using instruments like SAFEs (or potentially convertible notes), not to priced equity rounds or direct share issuances. If you attempt a traditional priced round during the ODI process – i.e. issuing new shares at a set valuation (creating a class of preferred stock and allotting it to investors) – you would be stepping outside the bounds of what’s permissible mid-ODI. A priced round’s immediate share issuance would likely require that your ODI is already complete and all regulatory filings are in place, since you’d be changing the ownership structure of the foreign entity right away.
In contrast, an unpriced SAFE round involves no immediate change in the cap table (no new shares now, just a future promise). That’s why the SAFE approach is viable – it defers the actual equity issuance until later, essentially bridging the gap while you get your ODI approvals sorted. Experts stress that founders should not try to issue preference shares or conduct a Series A-type round until the ODI is done; the SAFE is meant as a stopgap to secure funding in the interim. Keep your round truly “unpriced”: no valuation decided yet, no shares given now. Once RBI compliance is finalized and the company structure is solid, you can then convert those SAFEs or raise a proper priced round with far less risk.
In summary, use this window for SAFEs only. Equity rounds with pricing or any instrument that behaves like an optionally redeemable security are off the table until post-ODI. Adhering to this distinction will keep you on the right side of the law.
Include an Inter-Company Agreement (IP and Transfer Pricing)
Amidst the excitement of raising funds and flipping overseas, don’t overlook the inter-company arrangement between your new U.S. entity and your existing Indian entity (if you still have one). Many Indian startups maintain an Indian subsidiary or team even after flipping to a U.S. parent company. It’s highly recommended to put a proper inter-company agreement in place to handle intellectual property and transfer pricing issues.
What does this mean? Essentially, you need a contract that documents how assets and work are shared between the two companies. For instance, if your product’s IP (code, patents, etc.) was developed in India, you should formally license or assign those IP rights to the U.S. company, or outline usage rights, so that the U.S. entity (the one investors are funding) has clear rights to use the IP. Likewise, if your Indian subsidiary is going to keep doing R&D or providing services (e.g. software development or support) for the U.S. parent, you should have a services agreement or cost-sharing agreement. This will specify that the U.S. company will pay the Indian entity for those services or share costs, ensuring each company’s finances are clean and at arm’s length.
Having these agreements is important for transfer pricing – the pricing of transactions between related companies. Tax authorities in both countries expect that if your U.S. corp is benefitting from work done in India or using IP created in India, there’s fair compensation in place. An inter-company agreement helps satisfy regulators that you’re not shifting profits inappropriately and that you’re complying with tax laws in both jurisdictions. It also prevents confusion down the line about who owns what IP, which can be critical for investor due diligence and eventual exits.
In short, as you implement the flip and take in SAFE money, get your paperwork in order between your entities. It might be a simple IP licensing agreement and a services agreement, but it will go a long way in avoiding tax headaches and demonstrating that your U.S. startup truly holds the keys to the business.
Investor Comfort: A Final Consideration
Before you rush into accepting investments mid-ODI, have an open conversation with your potential investors – especially if they’re from the U.S. or other countries unfamiliar with India’s ODI nuances. While the legal path is now clearer for using SAFEs during the ODI process, investor sentiment can vary. Some investors may be perfectly comfortable investing on a SAFE before your flip is fully complete (perhaps on advice from their legal counsel that everything is above board). Others, however, might be cautious about the uncertainty – they might prefer that the ODI formalities finish and that you can issue them shares soon after their investment, rather than holding a SAFE for an extended period.
It’s important to explain the situation and the plan to investors. Emphasize that the SAFE will convert once the company is ready to do a priced round and that you’re following expert guidance to keep things compliant. You might highlight that many startups are now using this route successfully. Nonetheless, be prepared to address questions like: “What if ODI approval faces delays or issues?” or “What happens if something changes in regulations in the interim?”
Ultimately, assess your investors’ comfort level. If a major VC is hesitant, you may decide to time the closing of their investment with the completion of ODI to keep them at ease. On the other hand, angel investors or overseas funds familiar with emerging market flips might be fine with the SAFE approach. Every investor has a different risk appetite and understanding, so getting their buy-in (figuratively and literally) is key. The last thing you want is an investor losing confidence because they feel the structure is too uncertain.
Conclusion
Navigating an India-to-US flip is no small feat, but it’s now more manageable to raise capital without stalling for regulatory processes. By leveraging an unpriced SAFE round – structured carefully to meet RBI’s ODI rules – Indian founders can bring in much-needed investment even as the ODI paperwork is underway. This approach circumvents the old delays, letting you keep up momentum for your startup. Just remember the ground rules: SAFEs only (no priced rounds yet!), make sure the SAFE terms comply with the ODI conversion requirements, and paper everything properly (inter-company agreements, compliance filings) to set a solid foundation.
A successful flip and fundraise requires balancing speed with compliance. Thanks to insights from experts, we have a path to do both. As you pursue this, stay transparent with your investors and advisors – ensuring everyone is comfortable and informed. With the right preparation, you can secure that investment and complete your ODI flip smoothly, positioning your startup to operate globally and access the best of both worlds. Here’s to breaking fundraising barriers and going global, without the wait!
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