Convertible Notes, SAFE & iSAFE — Which Instrument to Use in India
Quick Summary
Early-stage Indian startups raising bridge capital typically choose between Convertible Notes (CN), SAFE (Simple Agreement for Future Equity), and iSAFE (India SAFE). Each has very different legal treatment under the Companies Act, 2013 and FEMA, 1999. Picking the wrong one can disqualify your round or trigger RBI penalties. This article explains the right fit and how Founding Legals generates the correct instrument.
The Legal Breakdown / Why It Matters
Convertible Note (CN) — Defined under Rule 2(1)(c) of the Companies (Acceptance of Deposits) Rules, 2014. A debt instrument that converts into equity on a future trigger event (next priced round, maturity, or exit). Treated as a "non-deposit" only if minimum investment is ₹25 Lakh per investor and the startup is DPIIT-recognised.
SAFE / iSAFE:Not a debt instrument. A contractual right to receive future equity at a discount/cap. SAFE in its Western form is not legally recognised in India because Indian company law doesn't permit issuing shares without a defined price or face value upfront. iSAFE is the India-adapted version structured as CCPS with conversion deferral, made compliant by 100X.VC.
Which Instrument Works in India?
| Instrument | Indian Legality | Minimum Investment | Conversion Mechanism |
|---|---|---|---|
| Convertible Note | ✅ Legal (DPIIT startups only) | ₹25 Lakh per investor | Converts within 10 years into equity |
| SAFE (US-style) | ❌ Not recognised | N/A | N/A |
| iSAFE (CCPS-based) | ✅ Legal (via CCPS structure) | No statutory minimum | Converts on priced round / liquidity event |
| Equity Round | ✅ Legal | No statutory minimum | Direct equity allotment |
Key Terms in a Convertible Note
| Term | What It Means |
|---|---|
| Valuation Cap | Maximum company valuation at which the note converts (protects investor in up-rounds) |
| Discount Rate | % discount on the next round's price (typically 15–25%) |
| Maturity Date | When the note matures — must be within 10 years under Indian law |
| Trigger Event | Priced round, IPO, M&A, or expiry — whichever first |
| Interest Rate | Optional; if charged, attracts TDS under Section 194A |
How to Do It on Founding Legals
- Step 1: Go to Pitch → Instrument Selector. Answer 4 questions: (a) Are you DPIIT-recognised? (b) Is the investor Indian or foreign? (c) Investment amount? (d) Expected next round timeline? The platform recommends CN, iSAFE, or direct CCPS.
- Step 2: If CN is recommended, generate the Convertible Note Agreement with valuation cap, discount, maturity, and trigger events pre-filled.
- Step 3: File Form MGT-14 (if special resolution required) and issue the CN to the investor. Funds are received in the company bank account against a board-approved investor list.
- Step 4: On the next priced round, the platform runs the CN Conversion Engine — calculates whether the discount or the cap gives the investor more shares, and converts the CN into CCPS or equity automatically.
- Step 5: File Form PAS-3 for the share allotment within 30 days of conversion.
Under the Companies (Acceptance of Deposits) Rules, 2014, a Convertible Note from a single investor must be at least ₹25 Lakh to qualify as "not a deposit." Receiving smaller amounts as CN reclassifies them as public deposits — a serious violation attracting refund + interest + penalty under Section 73 of the Companies Act.
CNs are excellent for quick bridge capital between priced rounds where valuation is ambiguous. For your first institutional round, skip the CN and go directly to a priced CCPS round — most Indian VCs prefer the certainty of a defined cap table.