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A. Introduction
India's startup ecosystem has seen the emergence of various funding tools designed to address the challenges associated with early-stage fundraising. For many founders, terms like Compulsorily Convertible Debentures ("CCDs"), Compulsorily Convertible Preference Shares ("CCPS"), and Simple Agreements for Future Equity ("SAFEs") sound like a maze of legal jargon. However, each convertible instrument is designed to navigate an early-stage startup's bottlenecks in fundraising, particularly valuation uncertainty and need for rapid capital infusion, while balancing founder control and investor protection.
Convertible instruments facilitate the bridging of this gap, following the "money today, equity tomorrow" principle, allowing immediate investment with equity conversion at a subsequent stage, typically during a future fundraising round.
This newsletter analyses and compares various convertible instruments to help startups determine the most effective option in their fundraising journey.
B. Comparative overview
| Basis | CCD | CCPS | SAFEs |
|---|---|---|---|
| Nature | Hybrid financial instruments structured as debentures, but essentially 'deferred equity instruments' that mandatorily and automatically convert into equity shares upon maturity or occurrence of certain specified events. Unlike regular debentures, they do not carry the obligation of repayment at maturity. | Hybrid financial instruments providing investors with the security of preference shares that mandatorily convert into equity shares at a predetermined time. | Primarily a US concept and originating from Y Combinator, an American startup accelerator, it is a type of deferred equity investment contract commonly used by early-stage startups to raise capital from investors. It enables startups and investors to use a standardized term sheet, raising capital while deferring valuation, liquidation preferences, and participation rights to subsequent funding rounds. |
| Advantages |
Allow startups to raise capital with deferred equity dilution, lower initial interest costs, improved debt-equity ratio, tax advantages, and easier foreign investment compliance. For investors, CCDs combine fixed income with potential capital appreciation, reduced risk compared to equity, favourable conversion terms, and upside in high-growth ventures. |
Enables issuing startups to raise
capital by deferring equity dilution, maintaining founder control,
bridging immediate valuation gaps, and offering a flexible,
customizable instrument to attract investment. Provides investors with a hybrid structure combining the security of fixed dividends and liquidation preference with the potential for high returns through future equity conversion and capital appreciation. |
Benefits founders by offering a fast, simple, and low-cost fundraising method that is not debt, allows for high-resolution fundraising, while deferring the startup's valuation. For investors, SAFEs offer the potential for high returns through favourable conversion terms, align investor interests with company growth, avoid immediate shareholder obligations, and allow for faster deal closing. |
| Disadvantages | Being complex instruments, CCDs require strong financial expertise to explain to investors. They pose risk of shareholder dissatisfaction due to eventual equity dilution and mandate conversion even in poor performance of the company. In bankruptcy, they carry subordinate claims and suffer from limited liquidity, making them riskier for startups in unfavourable scenarios. |
For investors, drawbacks include limited liquidity and voting rights, exposure to market risk upon equity conversion, and interest rate risk affecting the fixed dividend return. Issuing companies face challenges with CCPS, including the complexity of negotiation, the certainty of future equity dilution, a potentially higher cost of capital, and adverse dividend tax implications. |
For investors in SAFEs risks include complete loss without repayment, absence of rights or control pre-conversion, uncertainty of eventual equity stake, and no interest accrual with returns dependent solely on future valuation. Founders using SAFEs face disadvantages like unpredictable and potentially significant future dilution, a complicated capital table requiring expert advice, diminished control as conversions occur, and the risk of conflict among future investors due to varied conversion terms. |
| Typical use cases | Frequently issued by startups to secure investor participation without immediate equity dilution, particularly where investors seek regulatory assurance and defined conversion terms while retaining potential equity participation. | Beneficial for startups in raising capital without immediately giving up equity or control, CCPS bridge valuation gaps, offer anti-dilution protection, and are negotiable to balance investor and founder interests. | SAFEs are beneficial for early-stage or bridge fundraising scenarios where the key priorities include speed, simplicity and deferring valuation, limited compliance burden and no immediate equity dilution. |
C. Indian equivalent of SAFEs
In compliance with existing Indian laws, a variation of SAFE called iSAFE Notes (Indian Simple Agreement for Future Equity) has emerged, gaining traction for its simplicity and efficiency. By deferring valuation to a future date, iSAFEs help startups avoid their overvaluation or under-valuation early on, which may potentially hinder future fundraising or resulting in investor dissatisfaction. Legally, iSAFE has taken the form of CCPS governed by Sections 42, 62, and 55 of the Companies Act, 2013 ("Act") read with Companies (Share Capital and Debentures) Rules, 2014 and Companies (Prospectus and Allotment of Securities) Rules, 2014 albeit with certain distinctions. A crucial distinction is that unlike CCPS, pre-money and post-money valuation is not required for the issuance of iSAFE. An iSAFE is a non-debt, convertible security that does not accrue interest but is classified as preference share, entitling holders to a nominal dividend. Similarly, unlike SAFEs, iSAFEs offer a safety net: in the event of a liquidity event before conversion, iSAFE holders are entitled to a portion of the proceeds, immediately in preference over the equity shareholders and after secured creditors.
D. Regulatory Landscape in India
The Indian startup landscape has seen a complete metamorphosis since 2016, with the Department for Promotion of Industry and Internal Trade ("DPIIT") taking constant initiatives to simplify the regulatory frameworks surrounding startups. The regulatory framework surrounding the issuance of CCDs and CCPS and that of SAFEs is as under:
- CCDs: Regulated under Section 71(1) of the Act mandating shareholder approval by special resolution with a maximum conversion period of 10 (ten) years. For Foreign Direct Investment ("FDI") purposes, CCDs are treated as "capital instruments" on par with equity from inception. Foreign Exchange Management Act ("FEMA") Regulations mandate that CCDs involving foreign investors be issued and converted at a price certified by a Cost Accountant, in case of unlisted companies, using internationally accepted pricing methodologies, with undervaluation leading to penalties.
- CCPS: Regulated by Sections 42, 55, and 62 of the Companies Act, 2013, CCPS are considered preference shares until conversion, and issuance requires a special resolution from shareholders. Foreign investment in CCPS is governed by FEMA and Reserve Bank of India (RBI) regulations. Like CCDs, CCPS are categorized as "capital instruments" for foreign investment and are eligible for FDI under the automatic route. Compliance with pricing guidelines is mandatory.
- SAFEs: Since SAFEs are not formally recognised under Indian law, they are structured to comply with existing regulations, being treated as CCPS and thus, governed under the Act and FEMA. For startups officially recognised under DPIIT and fulfilling a minimum threshold of INR 25,00,000 (Indian Rupees Twenty-Five Lakhs only) per investor per tranche, with a maximum 10 (ten)-year conversion window, Convertible Notes offer a SAFE-like instrument, are governed under Section 62(3) of the Act and provide investors the choice to convert debt to equity or seek repayment. Since 2017, Indian startups have seen significant acceleration in the adoption of Convertible Notes—rising from 9% (nine per cent) of pre-Series A deals in 2016 to 27% (twenty-seven per cent) in 2018, and by 2019, comprising nearly one-third of such financings.1
E. Practical Insights for Founders
Fundraising via convertible instruments depends predominantly on the startup stage, investor base and regulatory jurisdiction, with the critical decision being the balance between deferment of valuation, management of future dilution of ownership and debt risk, in the following manner:
- Stage of startup: For early-stage startups seeking quick funding and valuation deferral, SAFEs/ iSAFEs are ideal, subject to legal jurisdiction and investor comfort. Alternatively, convertible notes may be used if the startup is DPIIT-recognised. At growth stages, CCDs and CCPS are preferred due to their clear legal status in India.
- Investor base: Angel investors prefer SAFEs/ iSAFEs whereas venture capitalists usually prefer CCPS. Banks and structured investors may consider CCDs.
- Regulatory comfort: Convertible notes are preferable for DPIIT recognised startups. For foreign investments, CCPS and CCDs are safer options under FEMA regulations.
- Future Rounds: Selection of the appropriate and least complex instrument is imperative as it influences the startup's future capitalisation table.
- Negotiation Essentials: Negotiation of key terms in the convertible instruments, such as valuation cap, discount and conversion triggers is equally important to streamline current and future fundraising.
F. Success Stories: Indian Startups Using Convertible Instruments
- Ola (CCPS): Ola (ANI Technologies Pvt. Ltd.), in a pre-IPO financing round around December 2021, raised funds through CCPS, allowing investors to gain equity while giving founders operational control.2
- Udaan (Convertible notes and debt): In 2022, B2B e-commerce giant Udaan strategically diversified its funding by raising USD 400 (United States Dollar Four Hundred) million through a combination of convertible notes and debt.3
G. Conclusion
Convertible instruments are not just legal parlance — they are dynamic, strategic fundraising tools. Choosing the right instrument today is key to building a sustainable and growth-enabling capital structure tomorrow. With proper guidance and foresight, founders can transform convertible instruments to propel their vision, transforming compliance burdens into growth catalysts.
Footnotes
1. Wadhera, C. M., (2025, April 21). Unlocking the benefits of Convertible Notes: A comprehensive guide for Indian startup founders - Resperal.in. resperal.in - Empowering Professionals & Sharing Knowledge. https://resperal.in/unlocking-the-benefits-of-convertible-notes-a-comprehensive-guide-for-indian-startup-founders/.
2. Ola, Ola Electric bags fresh funds from a clutch of investors. (2021, December 9). Moneycontrol. https://www.moneycontrol.com/news/business/startup/ola-ola-electric-bags-fresh-funds-from-a-clutch-of-investors-7804801.html.
3. LegalMantra. (n.d.). Legal Mantra - Thinking ahead. Legal Mantra. https://www.legalmantra.net/blog-detail/Transformative-Funding-A-Deep-Dive-Into-Convertible-Notes-For-Indian-Startups#:~:text=By%20issuing%20convertible%20notes%2C%20Dunzo,of%20Convertible%20Notes%20and%20Debt
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