Raising capital is the single most important legal lifecycle event for many start-ups. The documents that appear in that process — the term sheet, the shareholders’ agreement (SHA) and now instruments modelled on the SAFE/iSAFE — define economics, control, exit rights and dispute resolution. For law students, mastering the legal nature of each instrument, how they interact with the Companies Act, and how courts treat them in India is essential. This article explains (1) what each document is, (2) when they are binding, (3) practical drafting points and (4) litigation trends founders and advisers must watch.

1. Term sheets — handshake or hard contract?

A term sheet is a short, commercial summary of the proposed deal: valuation, investment amount, share class, governance terms (board seats, veto matters), basic liquidation/exit mechanics and a timetable. Parties often label the term sheet “non-binding” — but labelling is not decisive. Indian courts and arbitration tribunals look for intention to create legal relations (language used, pockets of binding clauses such as confidentiality, exclusivity, governing law or expenses, and the parties’ conduct in performance). Recent high-profile disputes (the OYO–Zostel saga and related arbitrations/litigation) confirmed that even a non-binding term sheet can acquire binding effect when it contains clear obligations or the parties act in reliance on it. Practically, term sheets should explicitly carve out which clauses are binding (e.g., confidentiality, exclusivity, costs) and that the rest are “subject to documentation” — and counsel must ensure the conduct of the parties matches the intended binding scope.

Key points for students:

• Draft a clear preamble (non-binding vs binding) and separately identify binding “survivor” clauses (confidentiality, exclusivity, governing law, interim injunctive relief).
• Avoid detailed legalese that looks like definitive obligations if you intend non-binding status; but, if certain clauses must bind, isolate them and include express remedies.

2. Shareholders’ Agreements (SHA) — the relational contract

An SHA is a private contract among shareholders (and sometimes between shareholders and the company) that governs relationships: transfer restrictions (ROFR/ROFO/tag/drag), board composition, reserved matters, anti-dilution, vesting of founder shares, exit mechanisms and dispute resolution. Unlike the articles of association (AoA), which are filed with the Registrar and bind the company and members as a statutory document, an SHA is a contractual instrument between parties. Indian jurisprudence and commentary stress two practical rules:

1. AOA trumps SHA as regards the company: contractual provisions in an SHA cannot bind the company to act contrary to its AoA; a clash between AoA and SHA often weakens enforceability unless the AoA is amended to reflect the SHA or the AoA already allows the restriction. Courts and commentators repeatedly flag that where an SHA imposes transfer restrictions that are inconsistent with the AoA, the company may not be bound unless the AoA is aligned.
2. SHAs remain enforceable as contract inter se: even where the company is not a party to an SHA or the AoA is silent, shareholders can sue each other for breach of contract. Remedies include damages, specific performance (where appropriate) and injunctions; in many cases the practical remedy is arbitration (if SHA has an arbitration clause) or commercial litigation. Academic commentary describes Indian jurisprudence as “unsettled” but evolving to respect SHAs where they do not contravene mandatory corporate law.

Practical drafting checklist for SHAs: include (a) clear conflict-resolution hierarchy (AoA vs SHA); (b) an obligation to amend AoA on closing to reflect critical SHA transfer restrictions; (c) precise definitions of reserved matters; (d) dispute resolution (seat, arbitration, emergency arbitrator); and (e) exit formulas and valuation mechanics.

3. SAFE / iSAFE notes — the Indian adaptation

SAFE (Simple Agreement for Future Equity) originated in the US (Y Combinator) and gives investors a contractual right to future equity, typically triggered by a qualifying financing round. In India, because only companies can issue shares and regulatory regimes (Companies Act, FEMA, RBI/FDI) require careful instrument classification, practitioners adapted SAFE into iSAFE or structured SAFE-like economics through Compulsorily Convertible Preference Shares (CCPS) or convertible instruments that fit Indian law. Leading commentators (Vinod Kothari, practitioner notes, and law-firm pieces) emphasise there is no separate statutory safety net for SAFE in India — its enforceability depends on contractual design and compatibility with company law and securities/foreign-investment rules.

Practical implications:

• If you use a SAFE or iSAFE, ensure the instrument’s conversion mechanics are clear (cap, discount, trigger events), and that the instrument can be treated as equity (CCPS/CCD) where needed to satisfy RBI/FDI tests.
• Document how conversion affects ESOP pools, voting rights post-conversion, and anti-dilution. Retain independent legal opinions when foreign AIFs or regulated entities invest through SAFE-like instruments (RBI/FEMA thresholds and permitted instruments can be sensitive).

4. Interaction with Companies Act, securities and other rules

Several statutory and regulatory touchpoints must be kept in mind:

• Companies Act, 2013 and the AoA govern share capital, pre-emption/issue of shares, and procedures for altering AoA (Section 14 etc.). Where SHAs impose restrictions on transfer, the safe course is to align the AoA at the time of closing. Failure to do so weakens the ability to enforce transfer restrictions against the company.
• FEMA & FDI / RBI rules matter for foreign investments via SAFE or CCPS — classification of instrument (debt/equity) affects compliance and permitted investor classes. Where foreign investors use SAFEs, structure them to avoid being treated as inadmissible instruments.

5. Enforcement trends & illustrative cases

Recent Indian jurisprudence shows courts and tribunals will look beyond labels to substance and conduct. The recurring lessons:

• Term sheets can bind when parties manifest a clear intention and act in reliance — OYO/Zostel disputes are a prime example where tribunals and courts analysed the document language and parties’ performance to find enforceable obligations in pockets of the term sheet. Counsel should therefore be careful about what is promised and the executions that follow.
• SHAs are enforceable inter se but vulnerable if inconsistent with AoA. Commentators and case-notes repeatedly caution that SHAs which contradict AoA create practical enforcement problems; amend the AoA where necessary or explicitly bind the company to the SHA at closing. The jurisprudence is still developing, and scholars call it “unsettled,” but the trend favours enforcing SHAs where they do not violate mandatory company law.
• SAFE litigation is nascent but practical structuring is decisive. Because iSAFE/SAFE are relatively new in India, most disputes involve classification and enforceability of conversion triggers. Courts will respect well-drafted conversion mechanics and consistent corporate action (allotment, board approvals). Vinod Kothari and others suggest treating SAFE economics through CCPS/convertible instruments to reduce uncertainty.

6. Drafting red flags — what a junior lawyer must watch for

1. Ambiguous binding language in term sheets. If you label the term sheet non-binding but include operational deadlines and obligations without exit rights, you may create litigation risk.
2. AoA vs SHA mismatch. If the SHA imposes transfer restrictions, make AoA amendments part of the closing conditions. Simply relying on a private contract invites future enforcement issues.
3. SAFE triggers tied to illiquid conditions. Vague or subjective conversion triggers produce disputes; define triggers (qualified financing, IPO, sale) objectively and include fallback valuation formulas.
4. Regulatory blind spots for foreign investors. Check FEMA/RBI/FDI rules for instrument permissibility and get RBI/compliance counsel where necessary.

7. Practical closing checklist for counsel

• Ensure term sheet clearly states which clauses are binding.
• Draft SHA and make AoA amendment a closing condition for any shareholder-level restrictions you wish to bind the company.
• Use clean conversion formulas for SAFEs/iSAFEs; consider CCPS form where needed.
• Record board minutes, subscription agreements, bank transfers and escrow confirmations contemporaneously.
• Include dispute resolution with an emergency relief mechanism (injunctive relief) and define seat/seat-neutral arbitration rules.

Conclusion — substance over form

In India’s developing case law, form matters but substance rules. A term sheet can become binding if it contains clear promises and the parties act accordingly. SHAs are contractual powerhouses between shareholders but must be harmonised with the AoA to bind the company. SAFE/iSAFE instruments work in India as long as they are structured to sit comfortably within company, securities and foreign-investment law — and that typically means conversion mechanics are explicit and the corporate housekeeping at conversion is flawless. For law students, the practice test is interdisciplinary: corporate law, contract doctrine, securities/regulatory compliance and arbitration — all converge during fundraising. Learn to read documents with an eye for enforceability, drafting precision and regulatory checkpoints; that skillset is what makes a valuable start-up lawyer.

Select sources & further reading (starter list)

• OYO–Zostel disputes and commentary on term sheets and enforceability. (SRL)
• 22 Shareholder Agreements in India: An Unsettled Jurisprudence (OUP chapter) — overview of SHA jurisprudence. (OUP Academic)
• Vinod Kothari, “The iSAFE option to start-up funding: Legality and taxation” — SAFEs/iSAFEs in Indian context and structuring recommendations. (Vinod Kothari Consultants)
• India practice notes on iSAFE / SAFE (iPleaders, Mondaq, practitioner blogs) — practical drafting tips. (iPleaders)
• Companies Act, 2013 — Sections on Articles and alteration (for AoA vs SHA interaction). (India Code)