CCPS, CCDs, Convertible Notes or iSAFE? Choosing Your Seed Instrument in India, Including the Tax, FEMA and Company Law Traps

Founders often pick an instrument because a friend used it or because a lawyer had a template ready. Then, at the next round, they discover what that choice actually committed them to: a conversion discount stacking on top of a new valuation, a foreign investor holding something FEMA does not like, or a cap table that the Series A lead's lawyers take three weeks to untangle.

This is the comparison we wish every founder read before signing their first round.

The four instruments at a glance

CCPS: the default, and what founders misunderstand about it

Compulsorily convertible preference shares are the standard instrument for priced rounds in India. Investors hold preference shares that convert to equity, usually one-for-one at the start, adjusted later if anti-dilution protection is triggered. They carry a nominal preferential dividend, often 0.001% to 0.01%, non-cumulative, which exists mainly to make them preference shares.

Why CCPS works for investors:

• Liquidation preference sits naturally on a preference share.
• Anti-dilution adjustments work through the conversion ratio without issuing new shares.
• Under FEMA, CCPS count as equity instruments, so foreign investors can hold them as FDI.

What it costs you: a valuation report, board and shareholder approvals, a private placement offer letter, a separate bank account for subscription money, allotment within 60 days of receiving funds, and filings with the Registrar within 15 days of allotment. For foreign investors, add FEMA pricing and reporting. None of it is hard, but all of it takes time. The full closing sequence is in our guide to diligence and the closing timeline.

Convertible notes: fast, but with sharper edges than founders expect

Convertible notes let a DPIIT-recognised startup take money now and set the price later, usually at the next priced round with a discount of 15% to 25% and sometimes a valuation cap. They are not deposits under the Companies Act if they meet the conditions: at least ₹25 lakh from each investor in a single tranche, and conversion or repayment within ten years.

What founders miss:

1. The ₹25 lakh floor is per investor, per tranche. Five angels putting in ₹10 lakh each cannot use a note. They would need CCPS or an iSAFE.
2. You need a special resolution for conversion upfront. Converting a loan into shares requires shareholder approval that should be passed when the note is issued. Missing it creates a problem at exactly the moment you are closing your next round.
3. The discount and cap stack. If you raise ₹2 Cr on a note with a 20% discount and your Series A prices at ₹80 Cr pre-money, the note converts at ₹64 Cr. That extra dilution comes from founders, not from the new investor.
4. Foreign noteholders add paperwork. Notes issued to non-residents must be reported to the RBI on Form CN within 30 days, and the startup must be in a sector open to 100% FDI under the automatic route.
5. Repayment is a real risk. If there is no qualifying round within the note's life, the holder can often ask for repayment. Read the maturity terms.

iSAFE: a CCPS in disguise

The iSAFE (India Simple Agreement for Future Equity), popularised by 100X.VC, was designed to give Indian startups a SAFE-like experience within Indian law. Legally, it is a CCPS. It converts at the next priced round at a cap or discount, and until then the holder has limited rights.

Because it is a share issue, it goes through the same process as CCPS: valuation, approvals, private placement and filings. What you save is negotiation time on valuation, not paperwork. For foreign holders, FEMA's requirement that the conversion price or formula be fixed upfront applies.

US-style SAFEs and Indian companies

A standard Y Combinator SAFE is a contract, not a security recognised under the Companies Act or FEMA. An Indian company generally cannot issue one to raise money, especially from foreign investors. Founders who raise on SAFEs usually do so through a US holding company, which brings its own tax, reporting and later reverse-flip costs. If an investor offers a SAFE to your Indian entity, ask your lawyer before accepting the money.

Tax points that are easy to miss

• Angel tax is gone, but pricing rules are not. The tax on share premium above fair value was abolished for shares issued from FY 2024-25 onwards. FEMA pricing floors for foreign investors and the Companies Act valuation requirement still apply.
• Source of funds still matters. For closely held companies, share capital and premium from individual investors can be questioned if the investor cannot show the source of their money. Collect KYC and source documents for every angel.
• CCD interest is taxable income for the investor and needs tax deducted at source. If your CCDs carry interest, set up TDS compliance from the start.
• Conversion is generally not a taxable transfer for the holder of a CCPS or CCD converting into equity of the same company, but get this confirmed for your instrument's terms.

We cover the broader list in Angel Tax Is Gone: The Tax and Compliance Traps That Still Blow Up Rounds.

How to choose

If you are deciding on an instrument for a raise in the next six months, talk to us before you sign. Choosing well now saves weeks at your next round.

Read next: NRI investment, repatriable vs non-repatriable, India vs Delaware or Singapore holding structures and participating vs non-participating liquidation preference. Preparing to raise? See how our seed and angel round support works.