पाठशाला Pathshala · धन Dhan, Money · Lesson 12 · Build

iSAFE, SAFE and CCD: choosing the convertible instrument

A convertible lets a company take money now and argue about its value later. In India it comes in four legal forms, each with its own floor, clock and foreign-exchange rule.

Pathshala, The Founder Library · 11 October 2026 · 8 min read

Howrah Bridge emerges from morning mist over the river with small figures on the bank. — Photograph: Krishnendu Biswas · Pexels

The convertible was invented to let a young company take money before anyone could sensibly say what it was worth. The idea travels well. The paper does not: an American SAFE means nothing to an Indian registrar, and the Indian instruments that do the same job each carry a rule that decides who can use them.

This lesson compares the four that founders here actually meet. Why a convertible at all, what each instrument is in law, how a cap and a discount turn into shares (the figure lets you try them), the foreign-exchange and company-law rules each one triggers, and how to choose. The closing section is a ledger to keep from the first convertible to the last.

Why founders reach for a convertible

A priced round needs a valuation, a valuer’s report, a shareholders’ agreement and weeks of drafting. For a ₹50 lakh cheque from two angels before the product has a price, that machinery costs more than the argument it settles. A convertible removes the argument. The investor puts in money now; the company issues an instrument that converts into shares at the next priced round, on that round’s terms, with a reward for having gone first: a cap, the highest valuation at which the money will convert, and a discount, a percentage off the round’s price. The early holder gets whichever is better.

The deferral is real but partial. The cap is a valuation in all but name, set, as the [seed valuation](/library/seed-valuation-how-number-really-gets-set) lesson explains, by the first investor who commits. And because convertibles convert only when the next round is priced, several of them stacked up can take a large and unexpected bite out of the founders on a single day.

Four instruments, one family

The SAFE. Y Combinator introduced the simple agreement for future equity in 2013 and replaced it in 2018 with the post-money SAFE, whose advantage is that founders and investors can calculate immediately and precisely how much of the company has been sold. It publishes forms for American companies and, for Canadian, Cayman and Singapore companies, a single valuation-cap version. A SAFE is not formally recognised under Indian law: it is neither a share nor a debenture nor a permitted foreign investment instrument. It is the right paper only for a company whose parent sits in one of those jurisdictions.

The Bandra-Worli Sea Link crosses the water towards the Mumbai skyline at sunset. — Four instruments make the same crossing under different rules. Choose by who is investing and from where. Photograph: Janam Parikh · Pexels

The iSAFE. Published by the Mumbai fund 100X.VC in July 2019, the iSAFE takes the economics of a SAFE and puts them inside a compulsorily convertible preference share, the instrument the [CCPS lesson](/library/ccps-instrument-indian-vcs-actually-use) explains. It converts into equity shares at the earliest of the next priced round, a dissolution, merger or acquisition, or three years from issue. Holders rank ahead of founders and equity shareholders up to the money they put in. It comes in four public versions: cap with discount, cap only, discount only and most-favoured-nation. Because it is a share, the company must raise its authorised capital and run a private placement, but there is no minimum cheque and no DPIIT condition.

The convertible note. A debt instrument that converts into equity or is repaid, available only to a DPIIT-recognised startup. The deposit rules exclude it from the definition of a deposit only when it is ₹25 lakh or more from one person in a single tranche, and the holder may convert or seek repayment within ten years; non-residents may subscribe on the same floor. It is the only instrument here that can be repaid, which makes it the natural form for a family member who wants the option of getting the money back.

The CCD. A compulsorily convertible debenture: a debenture that must become equity shares within a fixed period. Under section 71 it needs a special resolution and a conversion period of no more than ten years, and the deposit rules exclude debentures that are compulsorily convertible into shares within ten years. It may carry interest, which a CCPS cannot in the same way, and it ranks as debt until it converts. Funds that want a coupon or creditor standing in the gap before a round reach for it.

Cap, discount and the conversion arithmetic

A company in Kochi takes ₹1 crore on an iSAFE with a ₹15 crore cap and a twenty per cent discount. If the next round prices the company at ₹30 crore pre-money, the discount would give the holder ₹24 crore and the cap gives ₹15 crore, so the cap decides: the ₹1 crore converts as if it had bought in at ₹15 crore, roughly 6.3 per cent before the new money, where the same money in the round would buy about 3.2 per cent. If the round instead prices at ₹12 crore, the discount gives ₹9.6 crore, below the cap, and the holder converts at that. The cap protects the early holder when the company does well; the discount protects them when it does not.

Three readings of the figure. The higher the next round prices relative to the cap, the larger the gap between the green line and the dashed one, and the more the convertible costs the founders on conversion day. A discount without a cap caps nothing; in a strong round it gives the early holder only a modest edge. And none of this is visible on the cap table until the round, which is why the closing section asks you to model every convertible the day it is signed.

A convertible does not avoid the valuation. It postpones the arithmetic to a day when the founders are busiest, and the cap quietly sets the price in advance.

The FEMA rules each one triggers

For a holder outside India the foreign-exchange rules decide which instruments are possible at all. The Reserve Bank’s Master Direction counts preference shares and debentures as equity instruments only when they are fully and mandatorily convertible and fully paid, so an iSAFE and a CCD qualify, an optionally convertible debenture does not, and a SAFE is not on the list. Convertible notes are permitted for DPIIT-recognised startups at ₹25 lakh or more in a single tranche.

The harder rule is about price. For a foreign holder the price or conversion formula must be determined upfront at the time of issue, and the price at conversion may not be lower than the fair value worked out at that time. A cap and a discount can be written as such a formula. What they cannot do is convert below the fair value certified when the instrument was issued. A discount to a down round, or a cap set below the valuer’s number on the issue date, can therefore be unusable for a non-resident exactly when it was meant to bite. Commission the valuation at issue, set the cap at or above it, and have the formula drafted by someone who has filed the reporting forms before.

The company-law and tax rules

For resident holders the company law is more flexible. Under rule 13(2)(g) of the share capital rules the price of the shares a convertible becomes can be fixed upfront at the offer, on a valuer’s report given then, or at a date no earlier than thirty days before the holder becomes entitled to convert, on a report no more than sixty days old. The second option is what lets a discount to the next round’s price work for resident holders. The company must choose at the offer and disclose the choice.

On tax, the angel tax that once let an assessing officer question the price of shares issued above fair value no longer applies, as the [friends and family](/library/friends-family-and-first-25-lakh) lesson explains. What remains is ordinary: a coupon on a CCD or a note is interest in the holder’s hands, and the company deducts tax at source when it pays or credits it; an iSAFE accrues no interest and carries only a nominal dividend. The deposit rules are the trap that catches founders in practice: a note below ₹25 lakh, or one taken before the company holds its DPIIT certificate, falls outside the exemption and risks being treated as a deposit that a private company may not accept from outsiders.

Choosing the instrument

Several resident angels with small cheques: the iSAFE, because there is no floor, no certificate requirement and the documents are public. One person with ₹25 lakh or more who may want the money back, into a DPIIT-recognised company: the convertible note. A fund that wants a coupon or creditor standing until the round, or a foreign investor who prefers debt-like paper: the CCD, with the conversion formula fixed at issue. A company with a parent in the US, Canada, Cayman or Singapore raising at the parent: the SAFE, in that parent. A round large enough to need a lead, a board seat and a shareholders’ agreement anyway: none of them; price the round in CCPS and be done.

Keep a conversion ledger

The day the first convertible is signed, start a ledger and keep it with the cap table. One row per instrument: holder, residence, amount, date, form, cap and whether it is pre-money or post-money, discount, most-favoured-nation terms, maturity or long-stop date, the fair value certified at issue for a foreign holder, and the date of the DPIIT certificate where a note depends on it. Each time a new convertible is signed, run the whole ledger through the figure at three next-round prices (half the cap, the cap and twice the cap) and write down what the founders hold after conversion at each. Review it on the first working day of every quarter, and in the quarter before any long-stop date, so that a three-year iSAFE converting on its own clock is never a surprise. The founders who keep this ledger negotiate the next round knowing what they own. The ones who do not find out from the investor’s lawyer.

Nothing here is legal, tax or investment advice. The deposit rules, the share capital rules and the foreign-exchange directions were checked on 11 October 2026 and change by notification; have every convertible drafted and reviewed by a lawyer and a company secretary who have closed one in India.