Equity vs Convertible Note vs CCPS vs SAFE (iSAFE): Startup Funding Instruments in India
Equity, convertible notes, CCPS and iSAFE compared for Indian startups: ₹25 lakh note minimum, 10-year conversion, FEMA rules and valuation needs.
Short answer
Priced equity or CCPS suits rounds where a valuation can be agreed; CCPS is what most institutional investors use. Convertible notes defer valuation but are open only to DPIIT-recognised startups, at ₹25 lakh or more per investor in one tranche, converting or repaid within 10 years. A US-style SAFE is not recognised in India; local iSAFEs are typically structured as CCPS.
- Convertible note issuer
- DPIIT-recognised startup only
- Convertible note minimum
- ₹25 lakh per investor, single tranche
- Convertible note tenure
- Convert or repay within 10 years
- Non-resident note reporting
- Form CN within 30 days
- Allotment to non-residents
- FC-GPR within 30 days
- Angel tax
- Abolished from 2024-25
What are the four instruments?
Equity shares give the investor ownership at an agreed price today. Compulsorily convertible preference shares (CCPS) carry preference rights on dividend and liquidation and must convert into equity, often at a price or formula tied to a future round. Under FEMA, CCPS count as equity instruments, which makes them the default for foreign venture investors.
A convertible note is a debt-like instrument that converts into shares later, or is repaid. Indian company law exempts it from deposit rules only when issued by a DPIIT-recognised startup for at least ₹25 lakh in a single tranche, convertible or repayable within 10 years. A SAFE is a US contract that has no direct counterpart in Indian law, so Indian versions marketed as iSAFE are generally drafted as CCPS.
Side-by-side comparison
The table compares the instruments on the points founders and investors negotiate most often. Legal requirements come from the Companies Act, the deposit rules and the FEMA Non-Debt Instruments Rules.
| Factor | Equity shares | CCPS | Convertible note | SAFE / iSAFE |
|---|---|---|---|---|
| Valuation needed now | Yes | Yes, though conversion price can be deferred by formula | No, set at conversion | Depends on structure; iSAFE as CCPS needs valuation |
| Who can issue | Any company | Any company | DPIIT-recognised startup | Not a recognised instrument; CCPS structure used |
| Minimum ticket | None in law | None in law | ₹25 lakh per investor in one tranche | As per CCPS rules |
| Investor rights | Voting and dividend | Preference on dividend and liquidation, voting as per law and agreement | Creditor until conversion | As per CCPS terms |
| Foreign investors | Allowed under FDI rules | Allowed under FDI rules | Allowed with conditions, Form CN | As CCPS under FDI rules |
| Company law process | Private placement or rights issue | Private placement | Board approval, deposit rule exemption | Private placement as CCPS |
| Typical use | Founders, friends, priced rounds | VC and angel rounds | Quick bridge or seed rounds | Small angel or accelerator cheques |
What compliance does each need?
Equity and CCPS issued to new investors usually go through private placement under sections 42 and 62 of the Companies Act, with a special resolution, a registered valuer's report, an offer letter in PAS-4, a separate bank account and a return of allotment in PAS-3 within 15 days. Issues to non-residents must be priced at or above fair value and reported in FC-GPR within 30 days.
Convertible notes need board approval and documents showing the deposit rule conditions are met. Notes issued to non-residents are reported in Form CN on the FIRMS portal within 30 days, and conversion later triggers FC-GPR. The abolition of the angel tax provision from 2024-25 removed a major tax risk for premium issues to residents.
Which should you choose?
The right instrument depends on round size, investor type and how quickly you need the money. These rules reflect common practice in Indian early-stage funding, but documents must be drafted for your facts.
- Institutional or foreign VC round: CCPS with a shareholders' agreement.
- Small angel cheques below ₹25 lakh each: CCPS or an iSAFE structured as CCPS, since convertible notes are not available.
- Fast bridge from existing investors, DPIIT-recognised: convertible note of ₹25 lakh or more each.
- Friends and family at a simple price: equity shares.
- Company not DPIIT-recognised: avoid convertible notes, or get recognition first.
Related services
Sources
- Convertible notes in India: rules, limits and filings (CalcGuru)
- Convertible notes vs compulsorily convertible debentures (Treelife)
- Convertible notes and SAFE-style instruments in India (Khurana & Khurana)
- DPIIT revised startup definition, G.S.R. 108(E) (Taxmann)
Written by the Refogo Editorial Team from the official sources above and checked on 2026-10-31. Laws, rates and due dates change, and authorities often extend deadlines, so confirm your own case with a qualified professional. This is general information, not legal or tax advice. Read our editorial policy or report an error to support@refogo.com.
Common questions
Is a SAFE legal in India?
There is no statutory SAFE instrument in India. A US-style SAFE given by an Indian company risks being treated as an unsecured deposit. Indian startups use CCPS-based iSAFEs instead.
Can a non-DPIIT company issue convertible notes?
Not under the deposit rule exemption meant for startups. Without it, money received could be treated as a deposit, which private companies are largely restricted from accepting.
Why do VCs prefer CCPS over equity?
CCPS give preference on liquidation and dividend while counting as equity for FEMA, and their conversion terms can protect investors against later down rounds.
Is angel tax still applicable to startups?
No. The provision that taxed share premium above fair value was abolished from 2024-25, so it no longer applies to new issues.