What is an iSAFE?
An iSAFE is the Indian version of the SAFE (simple agreement for future equity): the investor pays now, and the company issues a small class of compulsorily convertible preference shares (CCPS) that convert into equity shares at the next priced round, usually at a valuation cap or a discount, whichever gives more shares. Because it is a preference share, it is equity from day one: it is never repaid, it appears in the register of members, and any company can issue it.
What is a convertible note, and how is it different from a CCD?
A convertible note is a loan to a startup that converts into equity shares at the next priced round or is repaid. Under the Companies (Acceptance of Deposits) Rules 2014 only a DPIIT-recognised startup can take one without it counting as a deposit, for ₹25 lakh or more in a single tranche from each investor, converted or repaid within 10 years. A CCD (compulsorily convertible debenture) is also debt until it converts, but conversion is compulsory, so FEMA treats it as equity, which makes it the usual route for a foreign investor when the note conditions do not fit.
Should we use an iSAFE or a convertible note for an angel?
Use an iSAFE if you want the money to sit as equity from day one: it is a class of CCPS, so it is never repayable, any company can issue it and any investor can hold it, but it needs a special resolution, a Rule 13 valuation and a PAS-3 like any share issue. Use a note if you are DPIIT-recognised, the cheque is ₹25 lakh or more in one tranche and you want speed: no valuation and no allotment until conversion, but it is debt until then, with a maturity date. Saffron did one of each in October 2023, on the same ₹16 crore cap and 20 percent discount.
Can a company that is not DPIIT-recognised issue a convertible note?
Not on the terms this page describes. The deposit-rules exemption for convertible notes, Rule 2(1)(c)(xvii) of the Companies (Acceptance of Deposits) Rules 2014, is available only to a DPIIT-recognised startup, for ₹25 lakh or more in a single tranche from each person, converted or repaid within 10 years. Without recognition the money is a deposit, and a private company may accept deposits only from its members, within limits and with annual filings. Either get recognised first, through an online application on the Startup India portal, or use an iSAFE or CCDs, which any company may issue. One wrinkle for notes issued after February 2026: the deposit rules still define a startup by reference to DPIIT's 2019 notification (G.S.R. 127(E)), which the February 2026 notification replaced, and MCA had not updated that reference by late October 2026. A company recognised before February 2026 and still within the 2019 limits (10 years from incorporation, turnover up to ₹100 crore) is safely inside the exemption; a company recognised only under the 2026 notification, or relying on the higher ₹200 crore limit, should take legal advice before it issues a note.
Can a foreign angel invest through a convertible note, or must it be a CCD?
A foreign angel can invest through either a convertible note or a CCD, if the conditions fit. A person resident outside India may subscribe to a convertible note of a DPIIT-recognised startup for ₹25 lakh or more in a single tranche, reported in Form CN within 30 days of issue. CCDs work for any company in an automatic-route sector, are reported in FC-GPR within 30 days of allotment and must convert on a formula fixed at issue, at no less than fair value. The real difference is the exit: a note may be repaid at the holder's option, while a CCD must convert, because an optionally convertible debenture is external commercial borrowing. Investors from land-border countries need approval under Press Note 3 for either.
What is a post-money cap, and is it worse for founders?
A pre-money cap values the company before the notes convert, so the notes share in each other's dilution. A post-money cap, the standard form of the US SAFE since 2018, values the company after all the notes, so each investor's percentage is its money divided by the cap: ₹50 lakh under a ₹10 crore post-money cap is 5 percent before the round, however many notes follow. Every later note then dilutes only the founders. Neither is wrong, but the post-money version gets expensive as the stack grows, so model the one you are signing. Saffron used pre-money caps.
What happens if we never raise a priced round?
If no priced round ever happens, the long-stop clause decides what the investor ends up with. Saffron's iSAFE converts at the ₹16 crore cap valuation after 36 months, so Ritika becomes a shareholder on known terms and nobody can demand money back. Arjun's note converts the same way unless he elects repayment, the option founders should try hardest to delete, because it turns a failed fundraise into a debt claim. The CCD on this page converts at the cap with no repayment at all. If the company is sold before any round, the iSAFE pays Ritika the greater of her ₹60 lakh and its value at the cap.
Is interest normal on a convertible note or a CCD?
Interest on a convertible note or a CCD is common in India, but not universal. Indian notes and CCDs carry nil to 12 percent simple interest, with 8 to 10 percent typical where there is a coupon; Saffron's note pays none and the hypothetical CCD pays 8 percent. Interest costs cash and brings tax deduction at source: 10 percent under Section 194A (renumbered under the Income-tax Act 2025 from 1 April 2026) on a note, 10 percent under Section 193 on a resident's debentures, and Section 195 for a non-resident, with Form 15CA before each remittance. Interest added to the converting amount raises the investor's percentage, so keep it simple and stop it at conversion. An iSAFE pays a nominal dividend instead.
Does angel tax apply to an iSAFE, a note or a CCD?
Angel tax does not apply to an iSAFE, a convertible note or a CCD issued today. Section 56(2)(viib), which taxed a closely held company on share premium above fair market value, does not apply to shares issued on or after 1 April 2024. For earlier issues, such as Saffron's October 2023 iSAFE, a DPIIT-recognised startup was exempt subject to conditions, including a ₹25 crore cap on paid-up capital plus premium after the issue and a declaration filed with DPIIT. A note or a CCD issues no shares until conversion, so the question arose only then. Fair value still matters for the FEMA pricing rules and for Section 56(2)(x) on later transfers.
Do notes, CCDs and iSAFEs count on the cap table?
An iSAFE does from day one: it is a class of preference shares, so Ritika appears in the register of members and in every fully diluted table. A note or a CCD is debt until conversion, so the holder is not yet a shareholder, but your next investor will treat it as converted, and so should you. Show each instrument on its own line with the amount, cap and discount, and its as-converted percentage at two round prices. Leaving notes off the table is the commonest reason founders are surprised by their dilution at the round.
How many notes or iSAFEs are too many before a priced round?
There is no legal limit that bites at angel scale, but the arithmetic gets expensive fast. Every instrument dilutes the founders alone until the round, and instruments with different caps convert at different prices, which makes the round harder to model and harder to sell to a lead investor. A workable rule: price a round once the stack would convert into more than 10 to 15 percent of the company, or once you have more than three instruments on different terms. Saffron stopped at two, which took 6.25 percent at the seed.
What does a most favoured nation clause do in a note or iSAFE?
It lets an early investor adopt better terms you later give another investor in the same kind of instrument: a lower cap, a bigger discount, interest or extra rights. Saffron's version lets Ritika and Arjun elect better terms from any note or iSAFE issued before the qualified financing. That sunset matters. Without it, an MFN can reach into the priced round itself, and one that covers 'any other terms' can import a board seat or an information right you agreed for a strategic investor. Limit it to economic terms and to instruments issued before the round.
Can we repay a convertible note early?
Only if the note allows it, and Saffron's does not without Arjun's consent. The investor accepted the risk of an unpriced round for the chance of converting at a discount; early repayment takes that upside away, so most notes forbid prepayment or price it with a premium. The deposit-rules exemption also requires the note to convert or be repaid within 10 years in any case. An iSAFE cannot be repaid, because it is share capital that must convert, and a CCD held by a non-resident must convert too. If you want flexibility, negotiate a prepayment right with a fixed premium before you sign.
What filings are due when we issue and convert these instruments?
For an iSAFE or CCDs: special resolutions filed in Form MGT-14 within 30 days, a Rule 13 valuation, the PAS-4 offer letter, money into a separate bank account, allotment within 60 days and Form PAS-3 within 15 days of allotment. For a note: a Section 62(3) special resolution before the money arrives, also filed in MGT-14. A note or CCD still outstanding on 31 March goes in Form DPT-3 by 30 June. For foreign money: Form CN within 30 days for a note, FC-GPR within 30 days of allotment for CCDs or CCPS, and the FLA return by 15 July each year. At conversion: a Board resolution, PAS-3 within 30 days and FC-GPR when a non-resident's note or CCDs convert.
