ACQUIREMANThe main instruments at a glance
| Instrument | What it is | Typical use | Key points |
|---|---|---|---|
| Equity shares | Ordinary shares with voting rights | Founders; small angel cheques | Simple, but investors usually want preference rights |
| CCPS | Compulsorily convertible preference shares | Most seed to growth VC rounds | Carry investor rights (liquidation preference, anti-dilution); convert to equity later |
| CCDs | Compulsorily convertible debentures | Bridge rounds; some structured deals | Debt until conversion; must convert to count as equity under FEMA |
| Convertible notes | Debt convertible into equity on a future round | Pre-seed and bridge rounds for DPIIT startups | ₹25 lakh minimum in a single tranche; repay or convert within 10 years |
| iSAFE | India-adapted SAFE (simple agreement for future equity) | Pre-seed / seed | Usually issued as CCPS with valuation cap and discount |
Equity shares
Ordinary equity is the simplest instrument and what founders hold. Investors in priced rounds rarely take only equity because it lacks protections such as liquidation preference. A token amount of equity is often issued alongside CCPS so the investor appears on the register with voting rights.
Compulsorily convertible preference shares (CCPS)
CCPS are the workhorse of Indian venture capital. They:
- convert into equity shares on a set date or event (such as an IPO or a fixed conversion deadline);
- carry a liquidation preference — the investor gets its money back (sometimes with a multiple) before common shareholders in a sale;
- often include anti-dilution protection, adjusting the conversion ratio if a later round is at a lower price;
- carry a small fixed dividend that is rarely paid in practice.
Because they are compulsorily convertible, CCPS issued to foreign investors are treated as equity instruments for FDI purposes.
Compulsorily convertible debentures (CCDs)
CCDs are debt instruments that must convert into equity. They can carry interest and are sometimes used for bridge rounds or when investors want debt-like protection until conversion. Only fully and mandatorily convertible debentures count as FDI-compliant equity instruments for foreign investors.
Convertible notes
A convertible note is a loan that converts into shares at the next priced round, usually at a discount or subject to a valuation cap. In India, startups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT) can raise convertible notes of ₹25 lakh or more in a single tranche, convertible or repayable within 10 years, without the money being treated as a public deposit. Non-residents can also invest through convertible notes, subject to FEMA conditions and reporting.
iSAFE notes
The iSAFE (India Simple Agreement for Future Equity) adapts the US SAFE to Indian law. Because Indian law does not recognise a pure SAFE contract as a security, iSAFEs are typically issued as CCPS with a valuation cap and/or discount, converting at the next priced round. They give speed and simplicity at pre-seed and seed while staying within Companies Act and FEMA rules.
Valuation at the early stage
Early-stage valuation is more negotiation than formula. Investors look at the team, market size, traction, competition and the amount being raised. Common reference points:
- Pre-money vs post-money — know which one is being quoted, and whether the ESOP pool is included.
- Valuation cap and discount for notes and iSAFEs.
- Dilution — many seed rounds dilute founders by roughly 10–25%, depending on the amount raised and traction.
For the issue itself, a registered valuer’s report is generally needed for preferential allotments, and a FEMA-compliant valuation is needed for foreign investors (see FEMA pricing guidelines).
Rules every share issue must follow
- Private placement (Companies Act, 2013, section 42): offers can be made to a limited number of identified persons in a financial year (generally up to 200, excluding certain categories), through a private placement offer letter; money must be received through banking channels into a separate account and shares allotted within the prescribed time, with a return of allotment filed with the Registrar.
- Preferential allotment (section 62): special resolution of shareholders and valuation requirements.
- FEMA: foreign investment must comply with sectoral rules, pricing guidelines and reporting (Form FC-GPR within 30 days of allotment).
- Angel tax: the tax on share premium above fair value under section 56(2)(viib) of the Income-tax Act was abolished from FY 2024–25, removing a long-standing concern for startups raising from resident investors.
Term-sheet clauses founders should understand
- Liquidation preference — 1× non-participating is founder-friendly; participating or multiple preferences favour investors.
- Anti-dilution — broad-based weighted average is standard; full ratchet is harsh.
- Board composition and reserved matters — which decisions need investor consent.
- Founder vesting and lock-in — often four years with a one-year cliff.
- ESOP pool — size and whether it is carved out pre-money.
- Pro-rata rights, ROFR, tag-along and drag-along — these matter later in an exit; see selling a startup in India.
- Information rights and exclusivity — keep exclusivity short.
Raising early-stage capital through Acquireman
Acquireman lists early-investment opportunities for verified investors and helps founders present their companies clearly. Founders can ask Acquireman AI for a free investor-readiness report; investors can browse early investment deals after creating a profile.
Frequently asked questions
What is CCPS in startup funding?
Compulsorily convertible preference shares — the most common instrument in Indian venture rounds. They convert into equity later and usually carry investor protections such as liquidation preference and anti-dilution.
Can Indian startups issue convertible notes?
Yes. DPIIT-recognised startups can raise convertible notes of at least ₹25 lakh in a single tranche, convertible or repayable within 10 years, including from non-residents subject to FEMA conditions.
What is an iSAFE note?
An Indian adaptation of the SAFE (simple agreement for future equity). It is usually issued as CCPS with a valuation cap and/or discount, converting at the next priced round.
Has angel tax been abolished in India?
Yes. The tax on share premium above fair value under section 56(2)(viib) of the Income-tax Act was abolished from FY 2024–25.
How much equity do founders give up in a seed round?
It varies with the amount raised and traction, but many seed rounds dilute founders by roughly 10–25%. Founders should model dilution across future rounds, including the ESOP pool.
This article is general information for educational purposes, current as of 11 October 2026. It is not legal, tax, financial or investment advice. Laws, regulations and market conditions change — consult qualified professionals before acting. Acquireman is a marketplace and advisory platform; see our Terms of Use.