Every founder eventually hits the same question at the term sheet stage: what should the investor actually receive in exchange for the cheque? In India, the answer is constrained more tightly than in the United States, because company law and foreign exchange law both dictate which instruments qualify as valid capital, and getting the choice wrong can turn a routine bridge round into a statutory deposit violation or a FEMA contravention. The three instruments founders encounter most often, convertible notes, SAFEs (and their Indian cousin, the iSAFE), and compulsorily convertible preference shares, sit at different points on the trade-off between speed, cost and legal certainty.

Convertible notes: fast, cheap, but conditional on a status founders must actually hold. A convertible note is structured as debt: the investor lends money that either converts into equity on a triggering event, typically the next priced round, or is repaid with interest if no round happens. Under the Companies Act, 2013, money received this way would ordinarily count as a “deposit,” attracting the compliance burden and restrictions of the Companies (Acceptance of Deposits) Rules. The rules carve out an exemption, but only for a company recognised as a startup by the Department for Promotion of Industry and Internal Trade, and only if each tranche is at least Rs 25 lakh from a single investor and the note converts or is repaid within a fixed period, extended from five to ten years by an MCA amendment reported by Business Standard. Miss DPIIT recognition and the same instrument becomes an unauthorised deposit, exposing the company and its officers to penalties under the Act. For foreign investors, convertible notes carry a further advantage: they are one of the few instruments where the conversion price can genuinely be left to a discount or cap formula tied to the next round, rather than fixed in advance, which is why they remain the preferred FEMA-compliant vehicle for cross-border bridge financing into DPIIT-recognised startups.

SAFEs and iSAFEs: founder-friendly in Silicon Valley, harder to fit into Indian law. The Simple Agreement for Future Equity, popularised by Y Combinator, is neither debt nor equity in the conventional sense: no interest, no maturity date, and conversion only on a future priced round or exit, at a valuation cap or discount. That structure sits uneasily within the Companies Act and the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, both of which expect an instrument to be classifiable as equity, a compulsorily convertible instrument, or debt, each with defined conversion mechanics and, for foreign money, a price or formula fixed upfront. A plain-vanilla SAFE, with no maturity and no formula fixed at issuance, does not map cleanly onto any of these categories. Indian early-stage investors responded with the iSAFE, an adaptation drafted to preserve the commercial simplicity of a SAFE while being implemented, in the paperwork that actually gets filed, as a convertible note or as compulsorily convertible preference shares. Founders should treat the iSAFE’s enforceability as resting on that underlying structuring rather than on the instrument’s name, and, as this Bar and Bench analysis and this compliance note from VK Legal Associates both flag, should be cautious about using it where the investor is a non-resident, since the same DPIIT-recognition and formula requirements that apply to convertible notes and CCPS apply here too.

CCPS: the institutional default, at a higher cost of entry. Compulsorily convertible preference shares are unambiguously equity from the date of issue, both under the Companies Act and under FEMA, which is precisely why they are the standard instrument for Series A rounds and beyond, and for any round involving foreign institutional capital. Issuing CCPS means following the private placement route under Section 42 together with the preferential allotment and preference-share provisions of Sections 55 and 62(1)(c), which requires a special resolution passed by a 75 percent majority at a general meeting, a valuation report from an IBBI-registered valuer, and filings with the Registrar of Companies. Because CCPS are treated as equity from issuance, the conversion price or formula must be fixed at the time of issue and cannot value the shares, on conversion, below the fair value established at issuance, a discipline Cyril Amarchand Mangaldas describes in detail as central to how CCPS combine downside protection for investors with equity upside. In exchange for that upfront cost and rigidity, CCPS carry the liquidation preference, anti-dilution, board and information rights that institutional term sheets are built around, and there is no ambiguity later about whether the instrument was validly issued.

Choosing between them is really a question about who is investing, how fast, and what governance they will expect. A friends-and-family or angel round, where the company is DPIIT-recognised and the investors are comfortable with a debt instrument that converts later, is well served by a convertible note: it is quick, requires no valuation exercise at issuance, and is the cleanest route for a founder who genuinely does not want to price the company yet. A domestic pre-seed round where the investor wants SAFE-like simplicity can use an iSAFE, provided counsel confirms exactly how it has been papered underneath, and provided the founder understands it may need to be restructured before a foreign investor joins a later round. Once the round involves institutional or foreign capital, or the investor wants the protective provisions and governance rights that come with a priced round, CCPS becomes the practical default, and the additional cost of a valuation report and shareholder approval is the price of certainty.

The instrument a startup chooses at the seed stage is rarely revisited in isolation; it shapes the cap table, the next round’s paperwork, and, if chosen carelessly, the company’s exposure to deposit or FEMA violations that surface only during due diligence for a later round.