SAFE Notes vs. CCPS vs. Convertible Notes: Choosing Your Instrument in India
Authored by - Adv. Pranay Sawant, Senior Executive at Outsource360
Many Indian founders meet the SAFE vs CCPS question as a choice between two templates. For one Bengaluru start-up, the SAFE it entered into ended in a commercial court.
On 2 March 2023 an individual investor entered into a "simple agreement for future equity" with the start-up, a private limited company, and its affiliate with a San Francisco address. He paid Rs 4,95,435, recorded as equivalent to USD 6,000, by RTGS; his bank statement shows it on 6 March 2023.
About a year later, his claim said, the company offered him an exit: it would return USD 54,000, or Rs 44,98,200 at Rs 83.30 to the dollar, as on 15 December 2023. He accepted that day. Nothing was paid.
Emails in May 2024 went unanswered, and a legal notice followed on 11 July 2024, demanding the USD 54,000 within seven days with interest. After the pre-institution mediation required by section 12A of the Commercial Courts Act, 2015, he sued on 15 November 2024. The summons came back unserved; after a newspaper publication in April 2025, the court placed both companies ex parte.
On 7 August 2025 the court (Commercial Court, Bengaluru, CCH-88, Com.O.S. No. 1531/2024) decreed the claim: Rs 49,93,002 within three months, with interest at 12% a year until it is paid, and costs. The companies never appeared, so nothing was contested; filing to judgment took eight months and 23 days. The court didn't decide what a SAFE is in Indian law, which company got the money, or whether any deposit or foreign-exchange rule applied; it decreed an unchallenged claim, backed by the agreement, a bank statement and emails, as money owed.
That isn't how the document was designed. Y Combinator, which created the SAFE in 2013, says a SAFE "is not a debt and not a loan", with no interest and no maturity date. In Bengaluru, one ended as a money decree carrying 12% interest.
The label on a document doesn't decide what an investor holds in India; Indian law does. The answer is share capital, such as compulsorily convertible preference shares (CCPS), a statutory convertible note, or nothing the law recognises, and that's the real SAFE vs CCPS question.
SAFE vs CCPS in India is a legal choice first. A US-style SAFE has no lawful home in an Indian company's capital; CCPS, preference shares that must convert into equity, do. A convertible note is the third route, open only to DPIIT-recognised private companies: Rs 25 lakh or more per investor in one tranche, converted or repaid within ten years.
Parliament hasn't changed this. When a parliamentary committee reported on the Corporate Laws (Amendment) Bill, 2026 on 3 August 2026, the Ministry said only that it would "examine" a request for a statutory SAFE. Neither House had passed the Bill as at 14 October 2026. Here's how SAFEs, iSAFEs, CCPS and convertible notes work in India, and how to choose.
On this page
SAFE vs CCPS vs convertible notes: how the three compare in India
What is a SAFE note, and can an Indian company issue one?
What is an iSAFE note, and how close is it to a real SAFE?
Compulsorily convertible preference shares (CCPS): why investors ask for them
Convertible notes in India: who can issue them, to whom, and for how long
Foreign investors: CCPS or a convertible note, or a SAFE through a holding company?
How SAFEs, CCPS and convertible notes are taxed and accounted for
Cap, discount and dilution: SAFE vs CCPS examples worked through
Choosing between a SAFE, CCPS and a convertible note: a decision path
Frequently asked questions about SAFEs, CCPS and convertible notes
SAFE vs CCPS vs convertible notes: how the three compare in India
A SAFE, CCPS and a convertible note all let an investor pay now and take equity later, but Indian law treats them very differently. CCPS are share capital from the day they're issued, a convertible note is debt until it converts, and a US-form SAFE fits none of the categories that Indian company law and exchange control recognise.
Side by side: legal form, issuer, investor, minimum, price and lifespan
Here's SAFE vs CCPS vs a convertible note, with 100X.VC's iSAFE alongside, as the rules stood on 14 October 2026:
Feature | US-form SAFE | iSAFE (100X.VC) | CCPS | Convertible note |
What it is in Indian law | A contract for future shares with no Indian legal category | CCPS, by its issuer's own description | Preference share capital that must convert into equity | Debt first; converts into equity shares or is repaid |
Who can issue it | A foreign parent; no Indian company on its terms | As for CCPS | A company limited by shares, not an LLP | A DPIIT-recognised private company only |
Who can hold it | Investors in that foreign parent; on the texts, no Indian resident individual | As for CCPS | Residents and non-residents | Residents and non-residents, except Pakistani and Bangladeshi persons |
Minimum ticket | None in Y Combinator's forms | As for CCPS | No legal minimum | Rs 25 lakh or more per investor, in one tranche |
When the price is set | At the next priced round, within the cap or discount | Its terms defer the price to the priced round | Upfront, or at conversion if chosen at issue; upfront for non-residents | At conversion, under the note's terms |
Latest conversion | None: no maturity date | Three years from issue, on its issuer's terms | Within the 20-year limit for preference shares | Ten years from issue, unless repaid |
Company law, FEMA and accounts | Not share capital; outside FEMA's permitted list | As for CCPS | Share capital; an equity instrument; can be a liability under Ind AS | A deposit exemption; separately permitted for non-residents; a liability |
Filings | None in India | As for CCPS | Return of allotment; FC-GPR for a non-resident | Form CN for a non-resident; DPT-3 every year |
Repayable in cash? | On a sale, IPO or dissolution, under its terms | As for CCPS | No: a redemption right makes it optionally convertible | Yes, at the holder's option |
Sources: Companies Act, 2013, section 42, section 43, section 55 and section 62; Companies (Acceptance of Deposits) Rules, 2014, rule 2(1)(c); Foreign Exchange Management (Non-debt Instruments) Rules, 2019, rules 2, 18 and 21; Y Combinator's SAFE documents; 100X.VC's iSAFE page; Ind AS 32.
No public dataset shows how Indian rounds split between SAFEs, CCPS and convertible notes, so the table describes what the law allows, not what the market does. Why no column for ordinary equity shares? Nothing converts. Investors who want priority on a sale and anti-dilution terms take preference shares, and compulsory conversion keeps them in FEMA's equity category.
Why the investor's residence decides more than the term sheet
Two sets of rules apply, and only one reaches every investor. Company law binds every rupee: shares for new investors go through the private-placement process, and money that's neither application money nor an excluded receipt is a deposit.
FEMA adds a second layer for anyone resident outside India. The Non-debt Instruments Rules, 2019 let a non-resident hold equity shares, fully and mandatorily convertible and fully paid preference shares and debentures, and share warrants, plus a start-up's convertible notes under a separate rule, and which instruments count as foreign direct investment decides the pricing and reporting that follow.
So the convertible note vs CCPS choice can change with the investor. A resident angel's note must fit the Deposit Rules' start-up exemption, a US angel's note must fit FEMA's rule 18, and money from a non-resident is excluded from deposits, subject to FEMA. That's also why a US-form SAFE fails even in a purely domestic round: the company-law problem reaches resident money, and exchange control only adds a second problem for foreign money.
What is a SAFE note, and can an Indian company issue one?
A SAFE, or simple agreement for future equity, is a contract: the investor pays now for shares the company will issue at its next priced round. People talk of SAFE notes in India, but a SAFE isn't a note. A US-form SAFE has no lawful home in an Indian company's capital, whoever the investor is, which leaves CCPS or a convertible note to do its job.
How a Y Combinator SAFE works: valuation cap, discount, MFN and pro rata
Y Combinator launched the SAFE in December 2013 as "a replacement for convertible notes" and has used a post-money version as its standard since 2018. It now lists three US forms: a valuation cap with no discount, a discount with no cap, and an "uncapped MFN" with neither, plus an optional pro rata side letter. Its user guide still describes a cap-and-discount form, which YC withdrew on 28 August 2021; there's no Indian form.
A SAFE converts automatically when the company sells preferred stock in a priced round. On a post-money cap, the stake is the investment divided by the cap: YC's example is USD 500,000 on a USD 6.7 million cap, about 7.5%. A discount converts below the round's price, and an MFN SAFE takes the best terms of any SAFE issued later.
Do you have to pay a SAFE back? There's no interest and no maturity date, which is the difference between a SAFE and a convertible note in the US, where a note is debt that accrues interest and falls due. On a sale a SAFE holder takes the greater of its money back and the as-converted amount; on a dissolution, its money back if anything is left after creditors.
The UK's nearest equivalent is the advance subscription agreement. HMRC accepts one for SEIS and EIS relief only if the money cannot be refunded, the agreement cannot be varied, cancelled or assigned, it bears no interest and it has a long-stop date, which HMRC expects to be no more than six months away.
Where a SAFE breaks in India: deposits, share application money and FEMA
Indian company law has no category for money paid now for an unknown number of shares at a price set later. If SAFE money is application money, section 42 of the Companies Act, 2013 applies. The money sits unspent in a separate bank account until the allotment is made and filed, and must become shares within 60 days or be refunded within 15 more, with 12% a year interest from day 60 if late.
Otherwise it's a "deposit" unless an exclusion applies, and a private company may take deposits only from its members (section 73(2)). The punishment is a fine of at least Rs 1 crore or twice the deposit, whichever is lower, up to Rs 10 crore, and up to seven years' imprisonment for officers in default (section 76A).
Not every investor triggers the deposit rule. Money from a non-resident, an Indian company, a SEBI-registered fund, including an angel fund, or, with a declaration, a director (or, in a private company, a director's relative) is excluded; the rule bites on resident individual angels, LLPs, firms, trusts and HUFs.
For a foreign investor, exchange control adds a separate bar. A SAFE is neither an equity instrument nor a start-up convertible note under the Non-debt Instruments Rules, 2019, so the money must be matched by shares within 60 days or refunded within 15 days after that. Otherwise the company is in contravention and faces compounding. Those clocks bite at any size: Groww's Indian company refunded Rs 4,804 of excess share application money from its own Delaware parent late, and the RBI compounded it in May 2019 with a Rs 316 penalty, its November 2025 prospectus records.
Section 43, which divides share capital into equity and preference shares, isn't one of the obstacles, because a SAFE is not share capital at all. In India, SAFE vs CCPS comes down to whether the money becomes share capital on allotment; a SAFE leaves it as application money or a deposit.
What is an iSAFE note, and how close is it to a real SAFE?
An iSAFE note is the Indian version of the SAFE that 100X.VC says it pioneered in July 2019, and its own page says it "takes the legal form of compulsorily convertible preference shares (CCPS)". So there's no iSAFE or CCPS choice to make: an iSAFE is CCPS with SAFE-style conversion terms.
An iSAFE takes the form of CCPS: the three-year backstop and the paperwork
According to 100X.VC's FAQ, an iSAFE converts into equity shares on the next priced round, a dissolution, a merger or an acquisition, "or at the end of three years from the date of issue, whichever is earlier". Holders rank ahead of founders and equity shareholders "to the extent of their invested capital". 100X.VC offers four templates (valuation cap with discount, valuation cap, discount, and MFN) behind an email form, which weren't reviewed for this guide; its 2019 FAQ described a 0.0001% non-cumulative dividend.
Because it's CCPS, an iSAFE is a share issue from day one: a special resolution, a private-placement offer, a registered valuer's report on the issue price, a return of allotment and, as 100X.VC notes, higher authorised and paid-up capital. A foreign investor can hold one, as an equity instrument, but FEMA then requires the conversion formula to be fixed at issue and never to give a price below the fair value certified at issue.
What if no priced round ever comes? That three-year backstop is the sharpest SAFE vs CCPS difference in practice: a US SAFE has no maturity date, while an iSAFE holder ends up with equity anyway.
SAFE-like terms through CCPS or a convertible note, and why parked money fails
Founders who want SAFE-like economics on their own paper have three lawful routes. On a reading of the rules, CCPS can carry a cap or discount conversion formula, within the registered-valuer rules and, for foreign holders, FEMA's fixed-at-issue requirement. A DPIIT-recognised private company can issue a convertible note, which starts as debt and converts into equity shares, for Rs 25 lakh or more per investor and within ten years. And compulsorily convertible debentures (CCDs) sit in the company's books as debt until they convert, yet count as an equity instrument under FEMA when fully paid, and stay outside the deposit rules if they must convert into shares within ten years.
What fails is parking the money as share application money until the round arrives. A resident angel's unallotted application money not refunded within 60 plus 15 days becomes a deposit under the Deposit Rules, and a non-resident's money runs into the same 60-day FEMA clock.
Compulsorily convertible preference shares (CCPS): why investors ask for them
Compulsorily convertible preference shares (CCPS) are preference shares that must convert into equity shares by a set date or event. In the SAFE vs CCPS choice, investors ask for them because one instrument gives priority on dividends and on a sale or winding up, room for anti-dilution and voting terms and, when fully paid, equity status under FEMA from issue.
Issuing CCPS: special resolution, registered valuer and when the conversion price is fixed
Issuing CCPS needs articles that permit it and a special resolution setting out dividend priority, participation, conversion, voting and redemption (rule 9 of the Companies (Share Capital and Debentures) Rules, 2014). An issue to new investors is a preferential allotment under section 62(1)(c), priced on a registered valuer's report, by private placement. The filings then run in a fixed order, a PAS-4 offer, allotment within 60 days, then PAS-3 and, for a non-resident, FC-GPR, and the full filing sequence for a funding round sets out each step.
On price, company law gives a choice that exchange control doesn't. Since 19 July 2016, rule 13(2)(h) lets the company fix the conversion price upfront, on the valuer's report at the offer, or at conversion, on a report no more than 60 days old, if it chooses at the offer. For a foreign holder, FEMA requires the price or formula upfront, which is why the convertible note vs CCPS choice looks different for a foreign angel: only the note leaves pricing until conversion.
Section 55 of the Companies Act, 2013 requires preference shares to be redeemable within 20 years, and CCPS terms set conversion inside that limit, although the section doesn't mention conversion. And a private company that isn't a small company, including holding and subsidiary companies, must issue CCPS in demat form only (rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014).
What CCPS holders get: liquidation preference, dividend, anti-dilution and voting
By law, preference capital carries a preferential right to a fixed dividend and to capital on a winding up (section 43), so CCPS terms can set a nominal rate, such as 0.0001%, as a drafting convention. A company without profits cannot pay even that: dividends come only out of profits (section 123).
The commercial rights sit in the terms and the shareholders' agreement: a liquidation preference, for example 1x and non-participating; anti-dilution protection that adjusts the conversion ratio after a lower-priced round; and conversion before an IPO. No public dataset shows how often Indian rounds use each.
Can CCPS holders vote before conversion? Section 47 lets them vote only on resolutions directly affecting their rights, winding up and the repayment or reduction of capital, plus every resolution once their dividend has gone unpaid for two years. A private company that hasn't defaulted in filing its accounts or annual return can disapply section 47 in its articles, which is how CCPS holders can get as-if-converted votes.
CCPS can be sold before conversion, subject to the articles, and a sale between a resident and a non-resident must meet FEMA's pricing rules. A non-resident's right to make the company or the founders buy them back is different: FEMA allows that option only after a minimum one-year lock-in and never at an assured price. And under Ind AS 32, CCPS with a variable conversion ratio or an investor exit right can count as a financial liability rather than equity.
Convertible notes in India: who can issue them, to whom, and for how long
A convertible note in India is a statutory instrument: money received first as debt, repayable at the holder's option or convertible into equity shares within ten years. Only a DPIIT-recognised private company can issue one, and two regimes set the conditions, the Deposit Rules for resident holders and FEMA for non-residents, which is what drives any convertible note vs CCPS decision.
The start-up test, the Rs 25 lakh tranche and the 2026 DPIIT notification
For a resident holder, the note is an exclusion from "deposit". Rule 2(1)(c)(xvii) of the Companies (Acceptance of Deposits) Rules, 2014 covers "an amount of twenty five lakh rupees or more received by a start-up company, by way of a convertible note", in a single tranche from a person, converting into equity shares or repayable within ten years (five before 7 September 2020). For a non-resident holder, rule 18 of the Non-debt Instruments Rules, 2019 sets the same Rs 25 lakh single-tranche floor, with ten years allowed since 12 April 2022 (S.O. 1802(E)). Pakistani and Bangladeshi citizens and entities cannot buy, and a start-up in a sector needing Government approval for foreign investment needs that approval to issue the note.
On the natural reading of "in a single tranche, from a person", the floor is per investor and per tranche, so five Rs 5 lakh instalments don't qualify. Money from an Indian company, a director giving a no-borrowing declaration or a SEBI-registered fund is outside the deposit rules, so the Deposit Rules' floor matters most for resident individual angels.
Both regimes need a recognised private company, so an LLP, a public company or a partnership firm cannot issue one, and recognition is its own process: how DPIIT recognition works and who qualifies is worth checking before the first note. Recognition itself changed in 2026: DPIIT replaced its 2019 start-up notification, G.S.R. 127(E), with G.S.R. 108(E) on 4 February 2026, saying nothing about earlier recognitions or older references. The Deposit Rules still cite the 2019 notification with no "as amended" words, while FEMA's definition says "as amended from time to time", so whether a given recognition satisfies either is unsettled: get written advice before relying on it.
Conversion, repayment and the note that never converts
What happens when the qualifying round doesn't come? In a Delhi High Court dispute over a Rs 2.1 crore "Convertible Note Agreement dated 24.10.2020", the investor claimed 10% of the share capital because the company hadn't raised money in time. The company disputed it, and on 12 July 2022 the court appointed an arbitrator by consent without deciding the merits (O.M.P.(I)(COMM.) 154/2022).
A note converts into equity shares only, under both regimes, never into CCPS. Pass the special resolution approving its conversion terms before the money arrives (section 62(3)), or conversion becomes a fresh preferential issue at a registered valuer's price; whether a note is also a "debenture" needing more approvals is unsettled.
Creditor status is the sharpest convertible note vs CCPS difference: until conversion the holder is owed money, repayable at its option. A note still outstanding after ten years fits neither definition; on the text it becomes a deposit for a resident angel and an unpermitted holding for a non-resident, so convert or repay before the tenth anniversary. Losing DPIIT status later doesn't, on the text, turn an outstanding note into a deposit, because the test is the company's status when the money is received; a new tranche after that isn't covered.
Foreign investors: CCPS or a convertible note, or a SAFE through a holding company?
For a foreign investor, SAFE vs CCPS comes down to three routes: CCPS or a convertible note in the Indian company, or a SAFE issued by a foreign parent. A SAFE issued by the Indian company fits no FEMA category, and each route has its own pricing, filings and later costs.
Pricing, Form CN, FC-GPR and the land-border rule
A non-resident's CCPS are priced at no less than fair value, on an internationally accepted method certified by a chartered accountant, SEBI-registered merchant banker or practising cost accountant, with the conversion price or formula "determined upfront" and never below fair value at issue (rule 21(2)(a) Explanation, Non-debt Instruments Rules, 2019). In January 2018 the RBI compounded a conversion of 5,432 CCPS into equity at Rs 1,543.08 a share, below the Rs 1,990.42 fair value at issue, once the Rs 34.58 lakh shortfall was remitted (Karadi Path Education Company, C.A. 741/2017, under the 2000 Regulations).
CCPS and convertible notes are priced at different moments. FEMA doesn't price a note at issue; the conversion shares must meet the entry route, sectoral caps and pricing guidelines then (rule 18(2)), so on the literal reading a cap or discount giving shares below fair value at conversion isn't open to a foreign holder.
Under the RBI's reporting Master Direction, the start-up files Form CN on the FIRMS portal within 30 days of issuing a note to a non-resident (the resident party, for a resident/non-resident transfer), and Form FC-GPR within 30 days of issuing conversion shares. CCPS go on FC-GPR once, within 30 days of allotment; nothing further is prescribed when they convert.
Investors from a land-border country, or beneficially owned there, need Government approval under Press Note 3 (2020), as amended from 2 May 2026, while smaller, non-controlling links are only reported. The note rule still bars only Pakistani and Bangladeshi persons, but conversion must meet the entry route, so get approval before issuing such a note.
Could this change? On 21 July 2026 the RBI placed the Government's draft Foreign Exchange Management (Foreign Investment) Rules, 2026 for comment; they'd replace the 2019 Rules and contain no upfront-formula or convertible-note rule. Comments closed on 31 August 2026 and, as at 14 October 2026, the draft hasn't been notified, so plan on the current rules.
When a SAFE does work: a Delaware or Singapore parent, and the bill that comes later
Y Combinator invests only in US, Canadian, Cayman and Singapore corporations and says companies incorporated elsewhere need to "flip". That's the lawful SAFE route for an Indian founder: the foreign parent issues the SAFE under its own law, and FEMA doesn't reach a foreign company's own securities issued to non-residents.
The Indian subsidiary still takes its parent's money as FDI, priced at no less than fair value even when the parent owns all of it, or as external commercial borrowing. Groww's Indian company incurred late submission fees on FC-GPR filings for 2018 and 2019 allotments to its Delaware parent, one later waived. And a resident founder with 10% or more of the votes in a foreign parent that owns an Indian subsidiary cannot set it up as a fresh overseas direct investment under Schedule III of the Overseas Investment Rules, 2022.
The bill arrives if the company comes home. In 2025 offer documents, Groww recorded Rs 13,396.84 million of estimated US tax on its outbound merger and Meesho Rs 25,590.71 million on its business combination, as their US preferred stock became Indian preference shares. That shows what it costs to bring a flipped company back to India at the largest scale. So the flip is an instrument decision: choosing YC-style SAFE paper means choosing a foreign parent and, if the company later lists in India, a reverse flip.
How SAFEs, CCPS and convertible notes are taxed and accounted for
Tax adds one more SAFE vs CCPS point: converting CCPS or compulsorily convertible debentures into equity is expressly not a taxable transfer under India's Income-tax Act, 2025, and the holder keeps the original cost and holding period. A statutory convertible note has no such express cover, and the accounts can show the same CCPS as equity or as a liability.
India: conversion, holding period, interest and the Income-tax Act, 2025
Section 70(1)(zb) of the Income-tax Act, 2025 (erstwhile section 47(xb) of the 1961 Act) treats converting preference shares into equity shares of the same company as no transfer. The 2025 Act carries over the preference shares' cost (section 73(1), Table Sl. No. 9) and holding period (section 2(101)(c)(B)(VIII)). Debentures converted into shares of the same company get the same treatment under section 70(1)(z) of the 2025 Act (erstwhile section 47(x) of the 1961 Act), with cost carried over under section 73(1), Table Sl. No. 3, and holding period under rule 6(2), Table Sl. No. 1, of the Income-tax Rules, 2026.
Is a statutory convertible note's conversion covered? That's not settled. If the note counts as a debenture or bond, section 70(1)(z) of the Income-tax Act, 2025 applies; if not, the conversion has no specific exemption, so take advice first. For a resident investor who wants tax certainty, that gap tilts the convertible note vs CCPS choice towards CCPS.
Conversion at a price fixed years earlier can draw another argument: that the holder received shares below fair market value (section 92(2)(m) of the 2025 Act; erstwhile section 56(2)(x) of the 1961 Act). ITAT Mumbai rejected it for optionally convertible preference shares on 20 January 2026 (ITA No. 1626/Mum/2025), deleting a Rs 120.64 crore addition; it's a tribunal order, not settled law.
Angel tax has no successor in the 2025 Act, but section 102 still makes the company explain its credits: a resident investor must explain the source of share money (section 102(3)), and a lender, resident or not, the source of loan-type money, including note and CCD money (section 102(2)). Interest on a note or CCD paid to a non-resident is withheld under section 393(2), Table Sl. No. 17, of the Income-tax Act, 2025 at the rates in force (Finance Act, 2026). On rupee interest, the rates are generally 30% for a foreign individual and 35% for a foreign company, before surcharge and cess, and subject to any lower treaty rate.
Ind AS 32, Indian GAAP and how US rules treat SAFEs
Companies below the Ind AS thresholds report under the Accounting Standards, where CCPS are share capital whatever their conversion formula, CCDs are borrowings, and SAFE-type advance money counts as equity only while it's non-refundable and within issued capital. Ind AS applies to listed or being-listed companies, unlisted companies with a net worth of Rs 250 crore or more, their group companies and voluntary adopters.
Under Ind AS 32, CCPS converting into a fixed number of shares are equity; a variable conversion, such as a cap or discount off the next round, or an investor buy-back right makes them a financial liability. Honasa Consumer's October 2023 offer document shows the cost: an investor buy-back right in its shareholders' agreement made its compulsorily convertible preference shares a liability and produced a Rs 13,612.43 million fair-value charge in its restated FY 2021 accounts, until the investors waived the right on 1 April 2021.
In the US, no FASB standard addresses SAFEs; Luminar Technologies, for one, booked its SAFEs as marked-to-market liabilities under ASC 480. No IRS ruling settles their tax, although YC's form says it intends stock treatment, and section 1202's QSBS exclusion needs stock of a US C corporation, so only a US parent's SAFEs could qualify.
Cap, discount and dilution: SAFE vs CCPS examples worked through
SAFE vs CCPS examples show what a cap or a discount really does. A priced CCPS round fixes the investor's share count now; a cap or a discount fixes only a formula, and the count waits for the next priced round.
One Rs 2 crore raise, three instruments: who owns what after the Series A
Illustrative arithmetic, not market data. A DPIIT-recognised company with 10,000,000 fully diluted shares (founders 9,000,000; an ESOP pool of 1,000,000) takes Rs 2 crore from one resident angel as CCPS, a convertible note or an iSAFE, then Rs 15 crore in a Series A at a Rs 60 crore pre-money valuation that includes the seed's conversion shares. Seed valuations are pre-money; no interest, fees, taxes or pool top-up:
Step | Priced CCPS | Convertible note | iSAFE |
Seed terms | Rs 2 crore at a Rs 18 crore pre-money valuation | Rs 2 crore; 20% discount, capped at a Rs 30 crore pre-money valuation | Rs 2 crore; 20% discount, no cap (assumed terms) |
Seed price per share | Rs 18.00, fixed now | Rs 30.00, the cap price | Rs 46.00, 80% of the Series A price |
Shares for the seed investor | 1,111,111 | 666,667 | 434,783 |
Series A price per share | Rs 54.00 | Rs 56.25 | Rs 57.50 |
Series A shares | 2,777,778 | 2,666,667 | 2,608,696 |
Total shares after the Series A | 13,888,889 | 13,333,334 | 13,043,479 |
Founders (9,000,000 shares) | 64.80% | 67.50% | 69.00% |
ESOP pool (1,000,000 shares) | 7.20% | 7.50% | 7.67% |
Seed investor | 8.00% | 5.00% | 3.33% |
Series A investor | 20.00% | 20.00% | 20.00% |
How it works: each Series A price is Rs 60 crore divided by the fully diluted shares after conversion. The note's Rs 30.00 cap price beats 80% of its Series A price (Rs 45.00), so the cap applies; the iSAFE's discount solves to a Series A price of Rs 57.50 and a conversion price of Rs 46.00. Share counts are rounded to whole shares.
Why does the Series A investor get 20% in every column? Rs 15 crore buys a fixed slice of a Rs 75 crore post-money company. The priced CCPS investor's 10% became 8%, diluted like everyone else.
The instrument does not move the numbers; the terms do. Give the iSAFE the note's Rs 30 crore cap and it converts into the same 666,667 shares, and when a round prices far above the cap, the cap is worth far more to the investor than a 20% discount.
The SAFE vs CCPS arithmetic above assumes a resident angel. For a non-resident, FEMA bites twice: CCPS, including an iSAFE, cannot convert below the fair value certified at issue, which can block a cap or discount conversion in a round priced below that value. And on the literal reading a note's conversion shares need at least fair value, so a Rs 30.00 cap price may not be usable. Even for a resident, the CCPS and iSAFE conversion terms rest on a registered valuer's report under rule 13, and a note converts without a fresh valuation only if a special resolution approved its terms before issue (section 62(3)), so know how Indian startup valuations are set before agreeing a cap.
What the Series A lead will ask you to clean up
Expect the Series A lead to want every convertible converted at the round and the share counts reconciled to the cap table. In practice, stacked convertible notes and iSAFEs at different caps, and MFN holders owed the best later terms, are where those numbers go wrong. The lead will also check each instrument's paper trail: special resolutions, valuer's reports, PAS-3 returns, Form CN and FC-GPR for foreign holders and, for a company that isn't a small company, demat holdings.
At an IPO the rule is strict. Under regulation 5(2) of the SEBI ICDR Regulations, any outstanding convertible security bars the issue unless it's fully paid and required to convert by the time the red herring prospectus is filed. For an offer for sale, the convertible's holding period counts towards the one-year minimum (regulation 8).
Choosing between a SAFE, CCPS and a convertible note: a decision path
Five facts pick the instrument: which company takes the money, where the investor lives, whether the company is a DPIIT-recognised private company, the size of each cheque, and whether you want to price now. The company and the investor's residence settle most of the SAFE vs CCPS decision.
Five questions that pick the instrument
Work through them in order; each answer narrows the SAFE vs CCPS choice before any commercial term is negotiated:
Which company takes the money? A foreign parent can issue a SAFE to non-resident investors; an Indian company cannot use the US form, so go to question 2.
Is the investor resident in India? A resident meets company law only; a non-resident adds FEMA's permitted list, pricing and reporting, and land-border beneficial ownership means Government approval first.
Is the company a DPIIT-recognised private company? If not, the convertible note is off the table: use CCPS, or CCDs.
Will each investor put in Rs 25 lakh or more in one tranche? If not, a resident angel or a foreign investor cannot take a note: use CCPS or an iSAFE.
Price now or later? Priced CCPS fix the price now; CCPS with a cap or discount formula, such as an iSAFE, or a note defer it, within the valuer rules for residents and FEMA's pricing for non-residents.
For a foreign angel putting Rs 25 lakh or more into a recognised start-up, the convertible note vs CCPS choice is real: the note leaves pricing to conversion, while CCPS fix the formula at issue. For a resident angel writing a Rs 10 lakh cheque, it isn't: the note is unavailable, so the choice is CCPS or an iSAFE.
The other instruments: CCDs, optionally convertibles, partly paid shares and warrants
Four more instruments appear in Indian seed and bridge rounds; here's where each sits under company law and FEMA:
Instrument | Company law | FEMA, for a non-resident | Watch-point |
Compulsorily convertible debentures (CCDs) | Debentures with a conversion option under section 71; outside the deposit rules if they must convert within ten years | Equity instruments if fully and mandatorily convertible and fully paid | Sit in borrowings; carry no votes before conversion |
Optionally convertible debentures or preference shares | An unsecured optionally convertible debenture from a resident individual can be a deposit | External commercial borrowing, with a loan registration number before drawdown | A three-year minimum average maturity, or one year for some manufacturers |
Partly paid shares | Allowed; on a preferential allotment, since 19 July 2016 | Equity instruments; 25% upfront, fully called within 12 months | The price is fixed upfront |
Share warrants | Issued as convertible securities under section 62(1)(c) and rule 13 | Equity instruments; 25% upfront, the rest within 18 months | The price or conversion formula is fixed upfront |
Sources: Companies Act, 2013, section 71; Companies (Acceptance of Deposits) Rules, 2014, rule 2(1)(c); Non-debt Instruments Rules, 2019, rules 2(k) and 21; Foreign Exchange Management (Borrowing and Lending) Regulations, 2018, Schedule I.
In the CCPS vs CCD comparison, the difference is the balance sheet and the votes: CCDs are debentures that sit in borrowings under the Accounting Standards and carry no voting rights until they convert, while CCPS are share capital. Under FEMA, both are equity instruments when fully and mandatorily convertible and fully paid.
Can a CCD convert into CCPS? For a resident, the deposit exclusion lets debentures convert "into shares", including preference shares, whereas a statutory convertible note converts into equity shares only. For a non-resident, a debenture not fully and mandatorily convertible into equity shares, including one redeemable for cash, is external commercial borrowing.
Frequently asked questions about SAFEs, CCPS and convertible notes
Is a SAFE note legal in India?
A US-form SAFE has no lawful home in an Indian company's capital. A resident angel's money must become shares within 60 days or be refunded within 15 more, or it's a deposit, which a private company may take only from members. FEMA adds a second bar for non-residents.
Can a US investor put money into my Indian company on a SAFE?
Not into the Indian company: a SAFE fits no FEMA category, so the money must become shares within 60 days or be refunded within 15 more. For a US investor, SAFE vs CCPS means CCPS or a note in India, or a SAFE from a foreign parent.
What happens to an iSAFE if no priced round ever happens?
According to 100X.VC's FAQ, an iSAFE converts into equity shares at the end of three years from issue at the latest, or earlier on a dissolution, merger or acquisition. The holder already owns CCPS, so it ends up with equity anyway; the templates' own terms weren't reviewed.
Can a foreign investor hold an iSAFE?
Yes. Because an iSAFE is CCPS, a non-resident can hold it as an equity instrument, but FEMA requires the conversion formula to be fixed at issue and not to give a price below the fair value certified at issue. The company files FC-GPR within 30 days of allotment.
Is CCPS debt or equity?
Under company law, CCPS are share capital. FEMA treats them as an equity instrument when fully and mandatorily convertible and fully paid. Under Ind AS 32, they can be a financial liability if the conversion ratio can vary or an investor has a buy-back right.
How long can CCPS stay unconverted?
Section 55 of the Companies Act, 2013 requires preference shares to be redeemable within 20 years, and CCPS terms set conversion inside that limit, although the section doesn't mention conversion. 100X.VC's FAQ gives an iSAFE a shorter limit: conversion within three years of issue.
Can CCPS be sold, or carry an exit right, before they convert?
Yes, subject to the company's articles, and a sale between a resident and a non-resident must meet FEMA's pricing rules. A non-resident's right to make the company or founders buy them back is allowed only after a minimum one-year lock-in and without any assured exit price.
Can a company without DPIIT recognition issue a convertible note?
No. Both the Deposit Rules and FEMA's note rule need a DPIIT-recognised private company, so an unrecognised company uses CCPS or CCDs instead. Since DPIIT's 4 February 2026 notification, whether a given recognition satisfies either regime is unsettled as at 14 October 2026: get written advice.
Is the Rs 25 lakh convertible note minimum per investor or per round?
Per investor and per tranche, on the natural reading of the Deposit Rules' words "in a single tranche, from a person", so smaller instalments cannot be added together. FEMA's rule 18 sets the same Rs 25 lakh single-tranche floor for non-resident holders.
What happens to a convertible note if the startup never raises again?
The holder is a creditor who can ask for repayment. The note must convert or be repaid within ten years; on the text, one left outstanding fits neither definition. Its fallback terms decide the rest, and courts can refer disputes to arbitration where the agreement says so.
Is an Indian convertible note the same as a CCD?
No. A statutory convertible note has its own exclusion in the Deposit Rules and its own FEMA rule, while CCDs are debentures under section 71 and, when fully paid, FEMA equity instruments. Whether a note is also a "debenture" under company law is unsettled.
Do convertible notes and CCPS have to be reported to the RBI?
Only for non-resident holders. On the convertible note vs CCPS filings, a note needs Form CN within 30 days of issue or of a resident/non-resident transfer, and FC-GPR within 30 days of issuing the conversion shares; CCPS go on FC-GPR once, within 30 days of allotment.
What is the difference between CCDs and CCPS?
CCPS are share capital; CCDs are debentures that sit in borrowings and carry no votes before conversion. Both are FEMA equity instruments when fully and mandatorily convertible and fully paid, and both convert without a taxable transfer under sections 70(1)(z) and (zb) of the Income-tax Act, 2025.
Can a CCD be converted into CCPS?
Yes for a resident: the Deposit Rules exclude debentures that must convert "into shares" within ten years, including preference shares; a note converts into equity shares only. For a non-resident, a debenture not fully and mandatorily convertible into equity shares is external commercial borrowing.
Is converting CCPS into equity shares taxable?
No. Section 70(1)(zb) of the Income-tax Act, 2025 (erstwhile section 47(xb) of the 1961 Act) treats it as no transfer, and cost and holding period carry over. On 20 January 2026 ITAT Mumbai also rejected a below-fair-value argument on a preference-share conversion, at tribunal level only.
How is a UK advance subscription agreement different from a SAFE?
HMRC accepts an advance subscription agreement for SEIS or EIS relief only if it's non-refundable, cannot be varied, cancelled or assigned, bears no interest and has a long-stop date, expected within six months. A SAFE has no long-stop date and can repay on a sale, IPO or dissolution.
References
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Disclaimer
This article is for educational and general business information purposes only and does not constitute professional legal, financial, or tax advice. It states the law as at 14 October 2026: the draft Foreign Exchange Management (Foreign Investment) Rules, 2026, placed by the RBI for comment on 21 July 2026, and the Corporate Laws (Amendment) Bill, 2026 are proposals, not law, and DPIIT's start-up definition, the rules that refer to it and the Finance Act's rates can change. Choosing an instrument needs advice on Indian company law, FEMA and income tax, and on foreign law where a foreign parent issues a SAFE; the worked example is illustrative arithmetic, not market data. For guidance specific to your situation, consult a qualified professional (a lawyer, company secretary or chartered accountant, and a US or UK adviser where relevant) before signing or accepting money.
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