Early-stage deals hate valuation arguments — the company is three people and a demo; any number is fiction. Convertible instruments solve this by deferring the question: money now, shares later at the next round's price (with protections). India's menu differs from Silicon Valley's: the CCD is the workhorse, the 'convertible note' is a specific regulated creature for DPIIT startups, and iSAFE is a market adaptation with fine print worth reading. Here is each instrument, honestly.
The instruments, compared
- CCD (Compulsorily Convertible Debenture): debt that must convert to equity per its terms — the standard Indian convertible, usable by any company, FDI-compliant (treated as equity for FEMA when compulsorily convertible), flexible on caps/discounts/maturity
- Convertible Note (Companies Act/DPIIT regime): a specific instrument only DPIIT-recognised startups may issue — minimum ₹25 lakh per investor in a single tranche, convertible or repayable within 10 years; genuinely note-like (can be repaid), lighter on valuation formalities at issue
- iSAFE: India's adaptation of YC's SAFE — legally structured as CCD/CCPS underneath (a pure 'SAFE' as in the US has no clean Indian legal home); the branding is simplicity, the document is the reality — read what it actually is
- CCPS (Compulsorily Convertible Preference Shares): the priced-round instrument, but also used convertible-style with adjustment formulas
The economic levers
All variants trade on the same three dials: valuation cap — the maximum valuation at which the money converts (investor's upside protection: a ₹1 crore cheque at a ₹10 crore cap owns ≥10% at conversion regardless of the next round's price); discount — conversion at (say) 20% below the next round's price, rewarding early risk; investors get the better of cap or discount, not both stacked (say so explicitly); and maturity/longstop — what happens if no round arrives: conversion at a default valuation, repayment (where the instrument permits), or extension by consent. Model conversions before signing: stacked converts with aggressive caps quietly pre-sell startling chunks of the company — the cap-table ambush of many Series A negotiations.
Section 56(2)(viib) ('angel tax') haunted premium issuances for years; its abolition for issues from FY 2024-25 removed the core sting — but conversion pricing, FMV reports at conversion, and interest on debenture components (TDS on CCD coupons) still need clean handling. And investors' side: CCD interest is taxable income; conversion itself is generally not a taxable event, the eventual share sale is. Draft with the CA in the room.
Drafting must-haves
- Trigger definitions: what counts as a 'qualified round' (minimum size), and treatment in non-qualified raises
- Exit-before-conversion: acquisition/liquidation treatment — money-back multiple or as-converted participation, chosen explicitly
- MFN clauses: early converts inheriting better terms given to later ones — standard ask, bounded sensibly
- Pro-rata rights at conversion; information rights sized to stage
- Interest (CCDs): coupon rates (even nominal) with TDS mechanics; FEMA pricing/reporting where investors are foreign (CCDs are FDI-friendly precisely because compulsorily convertible — keep them so)
- Board/consent scope: converts shouldn't carry priced-round control — resist veto lists riding on a seed note
Choosing the instrument
Practical selection: DPIIT-recognised startup raising from angels at ≥₹25 lakh cheques — the statutory convertible note is clean, fast and genuinely flexible (repayment optionality). Any company, any cheque size — CCDs with cap/discount terms are the default (iSAFE-branded documents typically are this). Foreign investors — compulsorily convertible instruments (CCD/CCPS) keep FEMA simple; optionally-convertible ones become ECB-debt with a different rulebook. Bridge into a known round — short-maturity CCDs with discount-only terms keep everyone aligned. Whatever the choice: file the private-placement mechanics properly (offer letters, PAS-3, valuation where needed) — convertibles skip valuation arguments, not company law.
How Aidwish helps
Aidwish structures early-stage raises — instrument selection, cap/discount modelling against the future cap table, DPIIT-note eligibility, FEMA-clean drafting for foreign cheques, and the placement compliance — so the money that arrives simply converts, later, without archaeology.