Pakistani founders raise from angels here, from diaspora investors in the Gulf, UK and North America, and from funds that will only invest into a foreign holding company.

Each of those creates a different structure, and the choice is made early — usually before founders take advice, and frequently in a document they were told was "not binding".

The term sheet is not as non-binding as you think

Most term sheets state that only some clauses bind. Read which ones:

Exclusivity / no-shop. Genuinely binding, and it stops you talking to other investors for a period. Negotiate the length, and make it lapse if diligence stalls.

Confidentiality. Binding.

Costs. Who pays legal costs if the deal collapses — often you.

The rest is commercially binding in practice, because reopening an agreed term later signals bad faith and rounds die that way. Treat the term sheet as the deal.

The terms to focus on:

  • Valuation (pre- or post-money — confirm which, the difference is real)
  • Option pool, and whether it comes out of the pre-money valuation, which dilutes founders rather than investors
  • Liquidation preference — 1x non-participating is standard; participating preferences take twice
  • Anti-dilution — broad-based weighted average is normal; full ratchet is punitive
  • Board composition and investor consent matters
  • Information rights and reporting obligations
  • Founder vesting, usually reset at the round — expect it, and negotiate credit for time served
  • Drag-along and tag-along
  • Pro-rata rights in future rounds

See shareholders' agreements and deadlock.

Instruments

Equity round. Shares issued at a valuation, with a shareholders' agreement and amended articles. Cleanest, slowest, most expensive.

Convertible note. A loan converting to equity at a future round, with a discount and often a cap. Note the debt characteristics — a maturity date, and interest — which matter if the next round does not happen.

SAFE. Common in international early-stage practice, and simple where the issuing entity is in a jurisdiction whose company law accommodates it. Adapting a SAFE to a Pakistani private limited company requires care — Pakistani company law has its own requirements for issuing shares, and an instrument drafted for another system does not automatically work here. Have it reviewed rather than signing a downloaded template.

Grants and accelerators, which usually take equity or a fee — read what they take and what they can block.

The offshore holding company question

Many foreign funds will not invest directly into a Pakistani private limited company, and will ask for a holding company in a familiar jurisdiction, with the Pakistani entity as a subsidiary doing the engineering.

Founders should understand what this involves before agreeing:

Doing it at the start is far easier than later. Restructuring after a round — transferring shares and IP to a new parent — raises valuation, tax and regulatory questions that can stall a company for months.

Regulatory permissions. Pakistani residents holding shares in a foreign company, and moving value out to establish one, engage the foreign exchange framework. This must be addressed properly rather than assumed.

IP must actually sit where the value is. If the holding company is the entity being invested in, the IP has to be assigned to it, and that assignment needs to be real, documented and priced defensibly — which is a transfer pricing question. See transfer pricing and related-party transactions.

The Pakistani entity becomes a service provider to the parent, on an intercompany agreement, invoicing cost-plus. That agreement needs to exist, and the proceeds must come in through the banking channel. See setting up a software house.

Tax and repatriation in both directions. See repatriating profits and capital and branch, liaison office or subsidiary.

There is no universally right answer. Raising locally, or from diaspora angels comfortable with a Pakistani entity, is simpler and cheaper. Taking institutional foreign capital usually means the offshore structure. Decide deliberately.

Foreign investors coming in

Foreign investment into Pakistani companies is broadly permitted, and the practical issues are share subscription through proper channels, documentation of the inward remittance, and structuring so dividends and eventual exit proceeds can leave again.

Get the inward remittance documentation right at the time of investment. Founders discover the problem years later, at exit, when the funds cannot be repatriated because the original subscription was never properly recorded. See overseas Pakistanis investing in Pakistan and joint ventures with a Pakistani partner.

What diligence finds, and what kills deals

Every round involves diligence, and the same problems surface:

No IP assignment from founders or contractors. The company does not own its own code. This is the most common and most damaging finding, and it is trivially preventable — assign IP to the company at incorporation, and get written assignments from every contractor. See open source licensing compliance.

Cap table problems. A co-founder who left with 30% and no vesting, verbal promises of equity to early employees, or shares "held for" someone else. Fix these before you raise, not during.

Corporate non-compliance. Missing filings, no board minutes, no statutory registers. See directors' duties and personal liability.

Tax exposure — undocumented foreign receipts, unpaid withholding, or an aggressive position on export treatment. See withholding tax obligations and FBR audit notices.

Employment issues — contractors who are really employees, no appointment letters, no EOBI/SESSI, no harassment committee. See employment contracts and the employer's harassment duties.

Data and privacy commitments made to customers that the company cannot meet. See data protection.

Unregistered brand, or a domain held personally by a founder. See trade mark registration and domain names and cybersquatting.

Two months of cleanup before a raise routinely improves both the valuation and the odds of closing.

Employee equity

Investors expect an option pool, and teams increasingly expect participation. Implementing it under Pakistani company law requires care with authorisation, valuation and tax. See ESOPs and employee share schemes.

Founder agreements — before any of this

If there is more than one founder and nothing is written down, do that first: shareholding, vesting, roles, decision-making, what happens if someone leaves, and IP assignment. It costs very little now and is the single most common cause of a startup collapsing at exactly the moment it starts working.

How the firm can help

We advise founders and investors on term sheets, structure and negotiate rounds, draft shareholders' agreements, convertible instruments and founder agreements, handle offshore holding structures and the associated regulatory and tax questions, and run the pre-raise cleanup that diligence would otherwise expose.

See corporate and commercial, or contact the firm — ideally before you sign the term sheet.