Before priced equity rounds, most Indian startups raise via convertible instruments — debt-like notes that convert to equity at a later funding round. Two formats dominate: Convertible Notes (CNs, RBI-regulated for Indian companies) and SAFEs (Simple Agreement for Future Equity, popularised by Y Combinator). The choice between them affects how fast you close, how much you dilute, and whether RBI compliance applies. Here's the no-fluff comparison.
What is a Convertible Note under Indian law?
The RBI defines a Convertible Note (CN) as an instrument issued by a startup recognised by DPIIT, in exchange for a minimum investment of ₹25 lakh in a single tranche, that converts into equity within 10 years. CNs are governed by FEMA Regulation 5 and Companies (Acceptance of Deposits) Rules.
Key features:
- Issuer must be a DPIIT-recognised startup
- Minimum ₹25 lakh per investor per tranche
- Foreign investment allowed — no FIRC delay vs equity
- Converts to equity at the next priced round, with discount (typically 15-25%) and/or valuation cap
- Interest can be charged (typically 6-9%)
- Maximum tenure: 10 years from issue
What is a SAFE and how is it different?
A SAFE is a contractual right to receive equity at a future financing event — there's no debt, no interest, no maturity date. SAFEs were created by Y Combinator in 2013 and have become the global default for early-stage investing.
Critically, SAFEs have no specific recognition under Indian company law. For Indian companies issuing to Indian investors, SAFEs are often used as a "warrant + side letter" hybrid — but there's no clean regulatory framework. For foreign investors investing into Indian startups, a SAFE is functionally not permitted under FEMA — you need a Convertible Note instead.
Convertible Note vs SAFE — head-to-head
| Aspect | Convertible Note (India) | SAFE (US-origin) |
|---|---|---|
| Legal status in India | Explicitly recognised by RBI for DPIIT startups | No direct recognition — structured as warrant or note variant |
| Minimum investment | ₹25 lakh per tranche | No statutory minimum |
| Foreign investment | Permitted under FEMA | Not directly — requires structuring |
| Interest | Optional, typically 6-9% | None |
| Maturity/expiry | 10 years max | No maturity — converts only on a financing event |
| Valuation cap | Common | Standard |
| Discount | 15-25% typical | 15-25% typical |
| Founder dilution if no priced round | Debt repayment due at maturity | Never converts — stays open indefinitely |
| Filing requirement | Form FC-GPR (foreign), PAS-3 on conversion | Less prescribed |
Which should I use as an Indian founder?
Three clear-cut decision rules:
- Raising from a foreign investor (US VC, NRI)? — Use Convertible Note. SAFEs are not FEMA-compliant for inbound investment into Indian Pvt Ltds.
- Raising under ₹25 lakh from an Indian angel? — Use a SAFE-equivalent structure (CCPS-with-cap or compulsorily convertible warrant). CN's ₹25 lakh minimum prices out smaller cheques.
- Raising ₹25 lakh+ from an Indian angel/HNI and you're DPIIT-recognised? — Use Convertible Note. It's clean, fast, and the conversion mechanics are well-precedented.
What are the must-have clauses in a Convertible Note?
- Valuation cap: Maximum pre-money valuation at which the note converts. Protects investors if the next round valuation balloons.
- Discount: Conversion at next-round price minus 15-25%. Rewards the early risk.
- Most-Favored-Nation (MFN): If you issue a later CN with better terms, this investor automatically upgrades.
- Maturity event: What happens if no priced round occurs in 24-36 months? Usually converts at a fallback valuation OR is repaid with interest.
- Information rights: Quarterly financials, board observer (optional), pro-rata participation in next round.
- Acceleration on liquidity event: If the company is acquired before conversion, CN holders get cash at note value × 1x-2x multiple.
What documents and filings are needed?
- Subscription Agreement (CN/SAFE master document)
- Board Resolution authorising the issue
- Shareholder Resolution (if Articles need amendment)
- Form PAS-3 within 30 days of conversion
- Form FC-GPR within 30 days of receiving foreign funds
- FIRC certificate from receiving bank
Get the docs right before you sign anything
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