Direct answer for founders

Most Indian startups should not sign a SAFE-style document, CCPS term sheet or CCD note just because an investor calls it standard. The right instrument depends on whether the money is domestic or foreign, whether the company is DPIIT-recognised, whether valuation can be fixed now, whether repayment is possible, how conversion will work, and what filings the company can complete without creating a future diligence problem.

For a private limited company raising from institutional investors, CCPS is still the most familiar priced-round instrument. CCDs can work when the commercial deal is debt-like but mandatorily convertible and properly structured. A US-style SAFE is not a plug-and-play Indian instrument. A convertible note has a specific Indian route for DPIIT-recognised startups and cannot be treated as a casual side letter. The founder should decide the instrument before negotiating valuation cap, discount, liquidation preference, anti-dilution, board rights or information rights.

Use official law and regulator material as the base. Section 42 of the Companies Act, 2013 covers private placement of securities: https://www.indiacode.nic.in/show-data?actid=AC_CEN_22_29_00008_201318_1517807327856&orderno=44. Section 62 deals with further issue of share capital: https://www.indiacode.nic.in/show-data?actid=AC_CEN_22_29_00008_201318_1517807327856&sectionId=49111&sectionno=62. RBI’s Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019, amended up to 13 June 2026, explain mode of payment and reporting for non-debt instruments: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11723. Invest India’s Startup India explainer on convertible notes explains the DPIIT-recognised startup route and the minimum ticket concept: https://www.investindia.gov.in/team-india-blogs/convertible-note-flexible-funding-options-startups.

Why the instrument choice matters

The instrument is not paperwork after the deal. It decides the legal shape of the deal.

A founder can negotiate economics aggressively and still damage the company if the instrument is mismatched. The risk usually appears later, when a Series A lawyer, an acquirer, an AD bank or a lead investor asks how the money entered the company and whether the instrument legally converted.

The three common options in plain English

Founders should also separate these from Indian convertible notes. A convertible note is a recognised Indian route for eligible startups, with specific conditions. A bare SAFE, a note, a CCD and CCPS are not interchangeable labels.

When CCPS is usually cleaner

CCPS works well when the startup and investor can agree valuation today. It creates a security on the cap table immediately, gives the investor preference rights, and is familiar to venture funds, angels, family offices and diligence teams.

CCPS is often suitable when:

1. There is a lead investor.
2. The round has a negotiated pre-money or post-money valuation.
3. Investor rights need to be built into the Articles and SHA.
4. Foreign investment can comply with FDI pricing, sector and reporting rules.
5. The company wants a clean priced-round history.
6. The conversion ratio, liquidation preference and anti-dilution terms can be written clearly.

The founder should not treat CCPS as ordinary equity with a fancy name. The preference terms matter: liquidation preference, participation, conversion events, anti-dilution, voting, reserved matters, transfer rights, exit rights, information rights and drag/tag rights. These must align across the term sheet, subscription agreement, shareholders agreement, Articles and board/shareholder resolutions.

CCPS founder checklist

The biggest mistake is closing money first and cleaning documents later. That may feel fast, but it makes diligence slower.

When CCDs may work

CCDs can be useful when parties want a debenture structure that will compulsorily convert into equity. They can be used in venture debt-like situations, bridge rounds or structured financings, but they need careful attention to company law, deposit rules, debenture documentation, valuation and FEMA treatment.

CCDs should not be used to promise open-ended repayment to an equity investor. If the investor can simply demand cash repayment instead of conversion, the company may be outside the intended compulsory-conversion logic. Founders should check whether the terms create debt exposure, whether interest is payable, whether security is being created, whether the investor is foreign, and whether the instrument falls under the correct FEMA framework.

CCD terms to review:

If a founder cannot explain how a CCD converts, when it converts, what happens on default and which filings are needed, the instrument is not ready.

Why SAFE-style documents need special caution in India

A SAFE is attractive because it looks short, founder-friendly and fast. The problem is that India does not treat a copied US SAFE template as a magic fundraising category. The document must be tested under Indian company law, contract law, FEMA, tax, accounting and valuation rules. If the investor is foreign, the risk increases because money cannot simply enter an Indian private company under an undefined future-equity promise.

A founder considering a SAFE-style instrument should ask:

1. Is this actually a convertible note, warrant, option, advance, security, deposit, debt or contractual right?
2. Is the company DPIIT-recognised if convertible note logic is being used?
3. Is the investor resident or non-resident?
4. What will be reported to the bank, RBI/FIRMS and ROC?
5. Does the document create a repayment obligation?
6. What happens if no priced round occurs?
7. How will the cap table show the investor before conversion?
8. Will the next institutional investor accept this document without restructuring?

If the answer is “we will fix it during the next round”, the founder is borrowing trouble from the future.

Domestic investor versus foreign investor

Foreign money adds a second compliance layer. The company should know whether the investor is a person resident outside India, whether the sector permits foreign investment, whether government approval is needed, whether land-border investment restrictions can apply, which instrument is permitted, which form is filed, what valuation certificate is needed and how quickly allotment or reporting must happen.

For non-resident investment, the file should include:

Do not let a foreign investor wire money before the instrument and reporting route are settled.

Founder decision table

This table is a starting point, not a substitute for transaction advice. The founder should make the decision with the company secretary, counsel, tax team and AD bank where foreign investment is involved.

Diligence issues investors will check later

Investors will test the instrument history, not only the current cap table. They may ask:

• Was the instrument approved by the Board and shareholders?
• Were Section 42 and Section 62 records maintained?
• Was the valuation report dated before the issue?
• Were funds received into the company bank account?
• Were allotment and return filings completed?
• Were Articles updated before giving investor rights?
• Was FC-GPR or Form CN filed where relevant?
• Did conversion trigger a fresh allotment or reporting step?
• Are the share certificates, registers and cap table consistent?
• Did any side letter give hidden rights?
• Was tax withholding considered on interest, discount or transfer?
• Does the instrument breach any lender, investor or grant covenant?

If these records are inconsistent, the next round may require compounding, rectification, renegotiation or investor waivers.

Common mistakes founders should avoid

• Signing a SAFE copied from a foreign accelerator without Indian review.
• Calling an instrument CCPS in the term sheet but documenting it as ordinary equity later.
• Accepting foreign remittance before checking FEMA route and sector conditions.
• Issuing CCDs with repayment rights that defeat compulsory conversion.
• Forgetting that conversion mechanics need board records, valuation and cap table updates.
• Keeping investor rights only in an email or side letter.
• Not updating Articles to match the SHA.
• Treating valuation cap and discount as commercial points only, without checking conversion math.
• Not tracking the ESOP pool impact on a fully diluted basis.
• Filing late because the founder thought the lawyer or investor would handle it.

Practical 10-step closing plan

Sources

• India Code, Companies Act, 2013, Section 42: https://www.indiacode.nic.in/show-data?actid=AC_CEN_22_29_00008_201318_1517807327856&orderno=44
• India Code, Companies Act, 2013, Section 62: https://www.indiacode.nic.in/show-data?actid=AC_CEN_22_29_00008_201318_1517807327856&sectionId=49111&sectionno=62
• RBI, Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019, amended up to 13 June 2026: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11723
• Invest India, Convertible Note: flexible funding options for startups: https://www.investindia.gov.in/team-india-blogs/convertible-note-flexible-funding-options-startups

FAQ Section

Founder / Business Takeaway

The fundraising instrument is a governance decision, not a template choice. The Best CS Firm In India approach is to make the term sheet, valuation, Articles, filings, FEMA route and cap table tell one consistent story before the investor money lands.

Related BSA Resources

• Shareholders Agreement and Investment Documentation: https://www.bhavyasharmaandassociates.com/services/shareholders-agreement-investment-documentation-startups-2025-delhi/
• Fund Raise Due Diligence: https://www.bhavyasharmaandassociates.com/services/fund-raise-due-diligence-service-for-startups-delhi-bangalore-gurgaon-2025/
• FEMA Compliance: https://www.bhavyasharmaandassociates.com/services/fema-compliance-foreign-investment-startups-2025-delhi/
• Blog: https://www.bhavyasharmaandassociates.com/blog/