The instrument you raise on is a legal choice, not just a commercial one
A founder closing their first cheque usually thinks the negotiation is about valuation and amount. In India, there is a prior question that matters just as much: which instrument the money comes in on. Get it wrong and the round is not just badly structured — it can be non-compliant, especially when the money is foreign. The US-style SAFE your accelerator handed you may not even be a legal instrument to receive foreign investment in India. This is the working map of how Indian startups actually raise before and at a priced round: the convertible note, CCPS, CCDs, and why the SAFE needs translating before you sign it.
Two ways to raise: price it now, or price it later
Every early round is one of two things. Either you agree a valuation now and issue shares against it (a priced round), or you take the money now and fix the price at the next round (a convertible instrument). Convertibles exist because pricing a pre-revenue company is a fight nobody wins — so you defer it. India gives you specific, regulated instruments for each path, and the rules tighten the moment a non-resident is on the cap table.
The convertible note: raise now, price at the next round
The convertible note (CN) is the cleanest "price it later" instrument, and it was built specifically for startups. It is money that converts into equity at the next priced round, usually with a discount or a valuation cap. But its Indian form is tightly defined under FEMA:
- Only a DPIIT-recognised startup can issue one. This is a hard gate — if you are not recognised, the CN route to foreign money is closed. It is one more reason recognition is worth getting early (see our Startup India and DPIIT recognition guide).
- A non-resident must invest ₹25 lakh or more in a single tranche. Below that, a person resident outside India cannot come in on a CN. (Citizens or entities of Pakistan and Bangladesh are excluded entirely.)
- It must convert into equity within ten years of issue — the outer window was extended from five to ten years.
- FEMA reporting: the company files Form CN within 30 days of issuing the note to a non-resident.
- Conversion price: at conversion, the price cannot be lower than the fair value worked out at the time of issue, under the FEMA pricing guidelines.
There is a Companies Act payoff too: a convertible note issued by a startup on these terms is excluded from the "deposit" rules, so it does not drag the company into the deposit-acceptance regime the way ordinary borrowing would.
CCPS: the workhorse of the priced round
When you do agree a valuation, the standard instrument in Indian venture is not ordinary equity — it is Compulsorily Convertible Preference Shares (CCPS). Investors prefer CCPS because they carry the economic and control terms a term sheet is really about: a liquidation preference (they get their money back first on an exit), anti-dilution protection, and often a preferential dividend — while still converting compulsorily into equity, which is what keeps them FDI-eligible.
That last point is the regulatory heart of it. Under India's FDI rules, foreign investment can only come in through a defined set of instruments: equity shares, CCPS, and Compulsorily Convertible Debentures (CCDs). "Compulsorily convertible" is the magic phrase — an instrument that could stay as debt or be redeemed for cash at the investor's option is treated as external commercial borrowing, not FDI, and is not allowed for a normal equity raise. CCPS threads that needle: preference-share protections on the way in, mandatory conversion to equity on the way out.
A CCPS round is a priced round, so it needs a valuation report for the FEMA pricing floor, the allotment paperwork (board and shareholder resolutions, Form PAS-3), and, for a foreign investor, FC-GPR reporting to the RBI within the prescribed window.
CCDs: the same idea, in debt clothing
Compulsorily Convertible Debentures (CCDs) are the debenture cousin of CCPS — also FDI-eligible, also mandatorily converting into equity, but structured as debt until conversion, which can suit investors who want a coupon or a different accounting treatment on the way in. The compulsory-conversion requirement is identical: an optionally convertible or redeemable debenture is not FDI-eligible.
The SAFE trap: don't take foreign money on a US SAFE
The SAFE (Simple Agreement for Future Equity) is the default early instrument in US startup land — no interest, no maturity, just a right to future shares. It does not translate to India. The Companies Act, 2013 recognises equity shares, preference shares and debentures — not a bare SAFE, and a US SAFE is not an FDI-eligible instrument. So a foreign angel who wires money against a standard US SAFE has, in Indian regulatory terms, done something that does not fit any permitted category.
The market solution is the iSAFE — an Indian adaptation introduced by 100X.VC in 2019, which is legally structured as CCPS. It behaves like a SAFE commercially (convert later, valuation cap, discount) but is a compliant, FDI-eligible instrument underneath. The lesson for founders: if an investor hands you a SAFE, do not sign the US template for foreign money — have it converted into a CCPS-based iSAFE or a convertible note first.
A simple decision guide
- Pre-seed, valuation genuinely unclear, foreign angel: a convertible note (if you are DPIIT-recognised and the cheque is ₹25 lakh+) or a CCPS-based iSAFE.
- Priced seed or Series A, institutional investor: CCPS — it is what the term sheet assumes.
- Handed a US SAFE by a foreign investor: translate it to CCPS/iSAFE before accepting the money; do not rely on the US form.
- Domestic-only angels, small round: you have more flexibility, but CCPS or a convertible note still gives cleaner downstream diligence than an informal instrument.
Whatever the instrument, the discipline from the end of angel tax still applies — clean investor KYC and documentation for Section 68 — which we cover in our explainer on the end of angel tax.
How we handle it at RDA, Baner
At RDA Advisory, Baner, we pick the instrument before we paper the round. We check whether a convertible note is open to you (DPIIT recognition, tranche size), structure priced rounds on CCPS with the valuation and FEMA pricing floor in place, and translate any US SAFE a foreign investor brings into a compliant CCPS or iSAFE. Then we complete the filings that actually make the round legal — Form CN or FC-GPR for foreign money, Form PAS-3 for the allotment, and the register updates — so the cap table survives a Series A diligence read years later. Office No. 102, Snehraj Apartment, Baner, Pune 411045 · call +91 77570 45059.
Raising a round? Get the instrument right first
Closing an early round in Pune? RDA chooses the instrument, structures the CCPS or convertible note, handles the FEMA pricing and RBI filings, and keeps the cap table clean. Book a consult at rdatax.in or call +91 77570 45059 — RDA Advisory, Baner, Pune. Start with our Startup India and DPIIT recognition guide, and see how ESOPs are taxed once the team is on board.
Verification note: Material positions — the convertible-note framework for startups (issuable only by a DPIIT-recognised startup company; investment by a person resident outside India of ₹25 lakh or more in a single tranche, excluding Pakistan and Bangladesh citizens/entities; conversion into equity within a period not exceeding ten years; Form CN reporting within 30 days; conversion price not below the fair value at issue; and the exclusion from the Companies Act deposit rules), and the FDI-eligible instrument set (equity shares, compulsorily convertible preference shares and compulsorily convertible debentures being eligible, while a US-style SAFE is not recognised under the Companies Act, 2013 or permitted as an FDI instrument, the iSAFE being an adaptation structured as CCPS) — are sourced from the Reserve Bank of India (rbi.org.in) and its Foreign Exchange Management (Non-debt Instruments) Rules, the Ministry of Corporate Affairs (mca.gov.in) and Startup India (startupindia.gov.in). FEMA rules, thresholds and reporting forms change; confirm the current position for your round with your CA and company secretary before issuing any instrument.
