Convertibles and Fundraising Instruments for Indian SaaS

Indian startups typically raise through a priced equity round using Compulsorily Convertible Preference Shares (CCPS), or through a bridge instrument that converts later, most commonly a convertible note or Compulsorily Convertible Debentures (CCDs). CCPS is the standard instrument for a priced venture round because it gives investors preference rights while compulsorily converting to Equity Shares. Convertible notes and CCDs are used to raise quickly without fixing a valuation now. The US SAFE is not an Indian instrument and does not fit cleanly under Indian company and foreign-investment law, so Indian-incorporated companies use notes, CCPS or CCDs instead.

A SAFE (Simple Agreement for Future Equity) is a US instrument designed for Delaware companies. An Indian-incorporated company cannot cleanly issue a SAFE because it does not map to a recognised security under the Companies Act and the foreign-investment rules, which expect capital to come in as equity or as a compulsorily convertible instrument like CCPS or CCDs. Founders who have flipped their holding company to the US or Singapore may use SAFEs at the holdco level, but for the Indian entity the practical equivalents are a convertible note, CCPS or CCDs. Confirm the right instrument for your specific structure with your counsel before you sign.

Both are compulsorily convertible instruments that turn into Equity Shares, but CCPS (Compulsorily Convertible Preference Shares) is equity-like, while CCDs (Compulsorily Convertible Debentures) start as debt and convert. CCPS carries preference rights such as a liquidation preference and is the standard instrument for a priced venture round. CCDs sit as debt on the balance sheet until conversion, can carry interest, and are sometimes used for bridge financing. Both must convert to equity within the timelines set by Indian foreign-investment rules; they cannot stay unconverted or be redeemed for cash like ordinary debt or redeemable preference shares.

Use a priced round (issuing CCPS at an agreed valuation) when you can support a valuation with real traction and want to set the cap table cleanly now. Use a convertible instrument (a convertible note or CCDs, with a valuation cap and discount) when you want to raise quickly, bridge to a larger round, or avoid pricing the company too early. Convertibles are faster and cheaper to close but defer the dilution question, and stacking several notes with different caps can create a messy cap table at conversion. Whichever you pick, keep the terms simple: an overcomplicated instrument today becomes very hard to unwind at the next round.

A convertible note or CCD converts into equity at the next priced round, and the valuation cap and discount decide the price the early investor pays at conversion. The valuation cap is the maximum valuation at which their money converts, so if the next round prices the company higher, they still convert at the lower cap and get more shares for backing you early. The discount gives them a percentage reduction (commonly ten to twenty percent) off the next round’s price. Where both apply, the investor typically gets whichever is more favourable to them. Both reward early risk and both should be set deliberately because they directly drive how much you dilute at conversion.

Keep the economics fair but watch the rights that bite later. A liquidation preference of one times, non-participating, is standard; avoid participating or multiple preferences that pay the investor twice on an exit. On anti-dilution, broad-based weighted average is founder-reasonable; a full-ratchet clause can wipe out your ownership in a down round. Limit board seats and reserved matters (investor veto rights) to what an early investor genuinely needs, because a long list of consent items can freeze ordinary decisions. Give reasonable protection for the money, not control, and remember that broad rights granted early compound painfully by the time you reach a later, larger round.