Table of Contents
This guide is written for founders and investors who are about to sit across the table from each other and want to do it from a position of knowledge, not hope.
Why the instrument is a deal-architecture decision, not a documentation formality
Most founders treat the choice of instrument as a back-office question – something the lawyers sort out after the term sheet is signed. That is precisely the mistake that surfaces eighteen months later, when a Series A investor’s counsel opens the data room and finds an optionally convertible instrument issued to a foreign angel, a convertible note that should have been a CCPS, or a “SAFE” downloaded from a US template that has no standing under Indian law.
The instrument you choose decides three things that outlive the round: who controls the conversion, what happens if the next round never comes, and whether the structure survives FEMA, the Companies Act, and an institutional investor’s diligence. Those are not documentation questions. They are deal-architecture questions. And in 2025–26, the answers changed.
We’ll come back to what changed. First, the instruments.
The comparison at a glance
| Convertible Note (CN) | CCPS | CCD | iSAFE / SAFE | |
| Legal nature | Debt initially; optionally convertible | Preference shares; compulsorily convertible | Debenture (debt); compulsorily convertible | Contractual right to future equity (resolves into CCPS) |
| Conversion | At holder’s option, or repaid | Mandatory, into equity | Mandatory, into equity | Mandatory CCPS issuance on a trigger event |
| Who can issue | Only DPIIT-recognised startups | Any company | Any company | Any company (via CCPS) |
| Minimum ticket | ₹25 lakh per investor, per tranche | No statutory minimum | No statutory minimum | No statutory minimum |
| Maximum tenure | 10 years to convert or repay | No cap (converts per terms) | Conversion within FEMA limits | Per trigger terms |
| Valuation fixed upfront? | No — deferred to next round | Yes (priced round) | Conversion price/formula set upfront | No — deferred to next round |
| Interest / yield | Optional (often nominal) | Dividend, if declared | Yes — interest-bearing | None |
| FDI treatment (foreign investors) | Permitted, automatic route; FEMA pricing on conversion | Eligible equity instrument; cleanest | Eligible equity instrument; cleanest | Via CCPS; SAFE itself not recognised |
| Best for | DPIIT startups deferring valuation | Priced VC rounds | Structured / yield-seeking investors | Fast, simple angel/accelerator rounds |
| Primary risk | Debt overhang if it never converts | Negotiated preferential rights | Interest cost + IBC classification debate | Drafting drift from Companies Act / FEMA |
Now the detail that matters when you’re negotiating.
Convertible Note (CN): the founder-friendly instrument with a debt tail
A convertible note is money received initially as debt that converts into equity at a future priced round — or, failing that, is repaid. Its appeal is simple: you raise now and defer the valuation fight to a later round when you have leverage.
But in India, the convertible note is a privileged instrument, not a default one. It can be issued only by startups recognised by the DPIIT, under Section 62(3) of the Companies Act read with the Companies (Acceptance of Deposits) Rules, which carve a qualifying note out of the definition of “deposit.” Three statutory conditions govern it:
- ₹25 lakh minimum per investor, in a single tranche. This single rule disqualifies most angel rounds with smaller cheques.
- Up to 10 years to convert or be repaid — a meaningful relaxation from the original five-year ceiling.
- A special resolution and filing of Form MGT-14 within 30 days; for foreign investors, Form CN within 30 days through the RBI’s FIRMS portal, with FEMA pricing applied at conversion.
The catch is in the word optionally. Because the holder can elect repayment instead of conversion, an unconverted note is a liability sitting on your balance sheet. If your qualifying round slips and the investor wants out, that note becomes a redemption demand at the worst possible moment. Convertible notes are founder-friendly on the way in and investor-friendly on the way out. Structure the conversion triggers, valuation cap, and discount with that asymmetry in full view.
Use a CN when: you are DPIIT-recognised, deferring valuation, raising cheques of ₹25 lakh or more, and want statutory clarity for a foreign investor on the automatic route.
Before you sign a single instrument
Most founders discover their structuring gaps only when an investor’s counsel begins due diligence. By then, an optionally convertible instrument issued to the wrong investor, or a note that should have been a CCPS, costs far more to unwind than it would have cost to get right.
The Startup Gig architects fundraising instruments that survive the next round’s diligence — aligning legal, FEMA, and tax before the term sheet hits the table.
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CCPS: the workhorse of the Indian venture round
If the convertible note is the bridge, Compulsorily Convertible Preference Shares (CCPS) are the destination. CCPS are the instrument of choice for priced rounds in India and the structure most institutional investors expect to see.
CCPS are preference shares that must convert into equity — there is no repayment optionality, which is exactly why investors and founders both trust the cap table they produce. Until conversion, they carry the preferential rights that define a venture deal: liquidation preference, anti-dilution protection, dividend preference, and information and governance rights, all negotiated into the terms. They are issued under Sections 42, 55, and 62 of the Companies Act via a special resolution, with allotment reported on Form PAS-3.
For foreign investors, CCPS are the cleanest path. They are treated as an eligible equity (“capital”) instrument under the FEMA Non-Debt Instrument Rules, qualify for FDI under the automatic route in most sectors, and convert without the optionality risk that complicates a note. And on the tax side, the conversion of preference shares into equity is not treated as a transfer under Section 47 of the Income Tax Act — so conversion itself triggers no capital gains.
Use CCPS when: you’re running a priced round, the investor wants negotiated downside protection, or you need a structure a foreign VC’s counsel will approve without redrafting.
CCD: certainty of conversion, with a yield attached
Compulsorily Convertible Debentures (CCD) sit closest to debt while still being an equity instrument for foreign-investment purposes. A CCD is a debenture that must convert into equity, but it carries interest during its life — which is the entire point. It gives the investor a yield while they wait for conversion, and gives the founder capital with the certainty of an eventual equity outcome.
That interest is also the trade-off. It is a real cash or accrued cost to the company, it is taxable income in the investor’s hands, it can attract TDS, and for a cross-border investor it raises withholding tax under the applicable DTAA. CCDs are eligible FDI instruments under the automatic route, but for non-residents the conversion price or formula must be fixed upfront and meet FEMA fair-value norms. There is also a live legal debate about how CCDs are classified under the Insolvency and Bankruptcy Code — debt or equity — which sophisticated investors will price in.
Use a CCD when: the investor wants the certainty of mandatory conversion and an interim return, or when a structured/debt-oriented investor is more comfortable with a debenture than a preference share.
SAFE and iSAFE: speed, simplicity, and one hard limit
The SAFE (Simple Agreement for Future Equity) is Y Combinator’s instrument: no interest, no maturity, no debt — just a contractual right to equity in a future round. It is elegant in the US. It is not recognised under the Indian Companies Act or FEMA, which means a US SAFE template dropped into an Indian round is, at best, an unenforceable promise and, at worst, a FEMA problem when foreign money is involved.
The Indian market’s answer is the iSAFE — pioneered by 100X.VC — a contractual arrangement engineered to result in the automatic issuance of CCPS on a defined trigger event. In substance, an iSAFE is CCPS with a wrapper: it gives founders SAFE-like speed and valuation deferral while resolving into a recognised Indian equity instrument. It carries no ₹25 lakh minimum, which is precisely why it works for angel and accelerator cheques where a convertible note cannot.
The hard limit: an iSAFE is only as compliant as its drafting. Because it bridges into CCPS, it must be papered to satisfy the Companies Act and — where the money is foreign — FEMA pricing and reporting. A loose iSAFE is a future restructuring waiting to happen.
Use an iSAFE when: you want speed and simplicity for an angel or accelerator round, you’re below the convertible note’s ₹25 lakh threshold, or you’re not yet DPIIT-recognised.
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The 2025–26 shift every founder must price in: angel tax is gone — but FEMA is not
For twelve years, the instrument decision in India was distorted by one provision: angel tax under Section 56(2)(viib), which taxed share premium above fair market value at roughly 31% — paid by the company, out of the very capital it had just raised. It pushed founders toward foreign money, then toward domestic, as the rules shifted, and made valuation a tax exposure rather than a commercial negotiation.
That era is over. The Finance Act, 2024 abolished angel tax entirely for all classes of investors — resident and non-resident — with effect from FY 2025–26 (1 April 2025). Premium pricing no longer triggers Section 56(2)(viib) on a new fund raise, regardless of who the investor is.
This is where sophisticated founders separate themselves from the rest. The abolition of angel tax does not abolish valuation discipline. Two things still bite:
- FEMA fair-value pricing. Where a foreign investor is involved, shares (and the equity into which CCPS, CCD, or a convertible note convert) cannot be issued below fair value determined by an internationally accepted methodology and certified appropriately. The angel tax floor is gone; the FEMA floor remains.
- Legacy assessments. Fund raises before 1 April 2025 can still be reopened for those assessment years. If you raised at a premium in FY 2022–23 or FY 2023–24, your valuation reports, board resolutions, and DPIIT filings are still your defence.
The practical consequence: with the tax distortion removed, the instrument decision can finally be made on its merits — control, optionality, investor fit, and FEMA — rather than to dodge a tax. That is a better world to structure in. It is also one where the firms that understand both the old regime and the new one hold the advantage.
The decision framework
Strip away the jargon and the choice resolves to a short sequence of questions.
- Are you DPIIT-recognised? If yes, the convertible note is available to you. If no, it is not — you’re choosing between CCPS, CCD, and an iSAFE.
- Is the money foreign? If yes, default to CCPS or CCD — they are the cleanest eligible equity instruments under FEMA, with the most certain treatment. A convertible note is permitted on the automatic route but adds conversion-pricing steps. A raw US SAFE is off the table. Never use an optionally convertible instrument (OCPS/OCD) for foreign money — it is not an eligible FDI equity instrument and will be treated as external debt.
- Are you deferring valuation? If yes, you want a convertible note (if DPIIT-recognised) or an iSAFE. If you’re running a priced round, CCPS is the instrument.
- How large is the cheque? Below ₹25 lakh, the convertible note is unavailable — use an iSAFE. At or above ₹25 lakh, the note is in play.
- Does the investor want a yield while they wait? If yes, a CCD delivers interim interest. If the investor is happy to wait for equity upside alone, CCPS or a note is cleaner.
Run those five questions and the instrument chooses itself. The art is in the terms that sit on top — valuation cap, discount, conversion mechanics, liquidation preference, anti-dilution formula — because that is where the next three years of your cap table are quietly decided.
Five structuring mistakes that surface in diligence
We see the same failures repeatedly when we run investor-side diligence — and each one was avoidable.
- Copy-pasting a US SAFE into an Indian round. It has no standing under the Companies Act or FEMA. Map it to a CN, CCPS, or iSAFE before any money moves.
- Splitting a cheque to dodge the ₹25 lakh convertible note minimum. The minimum is per investor, per tranche. Engineering around it invites a reclassification you don’t want.
- Leaving the conversion price open-ended. For foreign investors, a price or formula must be set at issue and meet fair-value norms at conversion. “We’ll figure it out later” is not a structure.
- Using optionally convertible instruments for foreign capital. OCPS/OCDs are not eligible FDI equity instruments. This is one of the most common — and most expensive — errors in cross-border seed rounds.
- Treating angel tax abolition as the end of valuation discipline. It removed one floor and left the FEMA floor standing. Cross-border deals still need a defensible valuation.
Every one of these is cheap to prevent and costly to cure. The cost is rarely the legal fee — it’s the deal momentum lost while you unwind a structure mid-round.
Key takeaways
- Convertible Note — DPIIT startups only; ₹25 lakh minimum; 10-year tenure; defers valuation; carries a debt-overhang risk because conversion is the holder’s option.
- CCPS — the default for priced venture rounds; mandatory conversion; carries negotiated preferential rights; cleanest equity instrument for foreign investors; no capital gains on conversion.
- CCD — mandatory conversion with interim interest; eligible FDI instrument; watch the tax cost and IBC classification debate.
- iSAFE — speed and simplicity for angel/accelerator rounds; no minimum ticket; resolves into CCPS; only as compliant as its drafting. A raw US SAFE is not recognised in India.
- 2025–26 reality — angel tax is abolished for all investors, but FEMA fair-value pricing and legacy assessments still govern. Structure on the merits now.
Frequently asked questions
Which fundraising instrument is best for Indian startups? There is no single best instrument. Priced venture rounds typically use CCPS; valuation-deferred angel rounds use a convertible note (if the startup is DPIIT-recognised) or an iSAFE; investors who want an interim yield use CCDs. The right choice depends on DPIIT status, investor profile, cheque size, and whether the money is foreign.
Can a startup that is not DPIIT-recognised issue a convertible note? No. Convertible notes can be issued only by startups recognised by the DPIIT. A non-recognised company should use CCPS, a CCD, or an iSAFE structured to issue CCPS.
Is a US-style SAFE legal in India? A US SAFE is not recognised under the Indian Companies Act or FEMA. The compliant equivalent is the iSAFE, a contractual arrangement engineered to issue CCPS on a trigger event.
Has angel tax been abolished? Yes. Section 56(2)(viib) — angel tax — has been abolished for all classes of investors, resident and non-resident, with effect from FY 2025–26 (1 April 2025). Fund raises before that date can still face assessment for prior years, and FEMA fair-value pricing continues to apply to foreign investments.
What is the minimum investment for a convertible note in India? ₹25 lakh per investor in a single tranche. Rounds below that threshold typically use an iSAFE, which has no statutory minimum.
Why do most Indian VCs prefer CCPS? CCPS convert compulsorily into equity, carry negotiated preferential rights (liquidation preference, anti-dilution, dividends), and are a clean, FEMA-eligible equity instrument for both domestic and foreign investors — giving a cap table investors and founders can both rely on.
The structure is the strategy
Founders who win their rounds don’t treat the instrument as paperwork. They treat it as the first negotiation — because the instrument decides who controls conversion, what happens if the next round is late, and whether the structure survives the diligence that follows. Get that right and the round closes clean. Get it wrong and you’ll meet the consequences at exactly the moment you have the least leverage to fix them.
That is the difference between drafting documents and architecting deals. It is the difference we were built to make.
If the round matters, the structure should too.
The Startup Gig advises founders, investors, and cross-border businesses across the full deal lifecycle — term sheets, instruments, cap tables, FEMA, and governance — as one integrated practice. Over 11 years, ₹800Cr+ in deal value advised, 2000+ startups and 180+ investors served.
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The Startup Gig is a venture deal advisory firm integrating legal, financial, tax, and governance counsel for founders, investors, and global businesses. This article is for general information and does not constitute legal, tax, or financial advice; instrument selection should be confirmed against your specific facts and the law in force at the time of your transaction.