An investor may say “convertible” as if it were one instrument. A convertible note, compulsorily convertible preference share and compulsorily convertible debenture can produce very different legal, pricing and exit results.
Choose the instrument after testing the company’s startup status, investor residence, cash-flow expectations and rights—not after copying the last round’s term sheet.
Quick Answer
A startup convertible note begins as debt with agreed conversion or repayment features and has specific eligibility conditions. CCPS and CCD are compulsorily convertible instruments with different company-law rights and FEMA treatment. For non-resident investment, RBI’s direction includes a ₹25 lakh single-tranche condition and ten-year outer period for qualifying startup convertible notes. Confirm current rules and the whole transaction before signing.
1. Convertible note: eligibility first
A startup convertible note is not an informal IOU that any company can issue. Its treatment depends on the relevant startup definition, deposit-rule exception and instrument wording. The note states when it converts or becomes repayable, and what valuation or discount applies at that event.
For a non-resident holder, RBI’s foreign-investment direction specifies at least ₹25 lakh in a single tranche and conversion or repayment within ten years, subject to sector, entry-route and pricing conditions. Resident-investor rules should be checked separately rather than inferred from the FEMA paragraph.
- Check current startup status and issuer form.
- Draft conversion and repayment triggers.
- Test investor residence and FEMA conditions.
2. CCPS and CCD: mandatory conversion
CCPS carry preference-share rights before conversion, while CCDs are debentures until their compulsory conversion into equity. Dividends, voting, liquidation, interest and conversion formula can therefore differ. A document called “compulsory” must actually compel conversion under its terms.
For non-resident investment, RBI treats fully and mandatorily convertible preference shares and debentures as equity instruments under conditions. Instruments that are optional or only partly convertible may instead be treated as debt and raise external-commercial-borrowing questions.
- State a compliant conversion formula upfront.
- Model pre-conversion rights.
- Check the debt/equity boundary under FEMA.
3. Price and control
The investor will negotiate discount, valuation cap, liquidation preference, information and veto rights. Those rights affect the founder’s economics even when the initial share count looks small. Run a fully diluted cap table at issue and at each conversion scenario.
FEMA pricing sets a further boundary for a non-resident. The future conversion price or formula must satisfy the current rules; a contract promising a guaranteed exit price can create a separate problem. Tax and accounting treatment should be reviewed for the chosen instrument.
- Model down-round and high-growth conversion.
- Check valuation and FEMA floor rules.
- Read exit rights alongside price.
4. Corporate process and recordkeeping
Each instrument has a different Companies Act and filing path. Approvals, offer route, valuation, certificates, registers and allotment returns must be identified before funds are accepted. The shareholders agreement and articles should reflect the promised rights.
At conversion, update the cap table and make required filings. An investor diligence file should show original instrument, money receipt, amendments, conversion calculation and issued shares. Missing documents can turn a simple seed instrument into a Series A closing obstacle.
- Choose route-specific approvals.
- Retain original and amendment versions.
- Calendar conversion and filings.
How to record the decision
A short decision note should explain why the chosen route fits the facts, which authority controls the point, what was checked and which assumptions remain open. For convertible note vs CCPS vs CCD, the note should also identify the responsible person, the next filing or approval event and the evidence that supports each conclusion.
Keep the note with board materials, agreements, portal acknowledgements and professional advice. This simple record helps founders answer investor, lender and regulator questions without reconstructing the reasoning months later. Update it whenever the business model, ownership, money flow, instrument terms or scheme status changes.
Documents to keep in one working file
The exact set depends on the transaction, but the working file should make the facts easy to test. Start with these records and add authority-specific forms or declarations where required:
- Confirm startup and investor eligibility.
- Choose instrument and lawful offer route.
- Model all conversion scenarios.
- Check valuation, tax and FEMA.
- Align SHA, articles and instrument terms.
Use dated versions and keep a clear approval trail. A missing email, valuation input or portal receipt can become a material due-diligence issue even when the commercial decision itself was sound.
Decision table
Use the facts of the proposed transaction to test each row before choosing a route.
| Instrument | Initial nature | Main founder question |
|---|---|---|
| Convertible note | Debt with conversion/repayment route | Is startup and investor eligibility met? |
| CCPS | Preference share converting to equity | What preference and dilution terms apply? |
| CCD | Debenture converting to equity | How do interest and conversion operate? |
| Equity share | Immediate ownership | What control is issued today? |
Practical checklist
Work through these steps using dated documents, not assumptions made in a pitch deck.
- Confirm startup and investor eligibility.
- Choose instrument and lawful offer route.
- Model all conversion scenarios.
- Check valuation, tax and FEMA.
- Align SHA, articles and instrument terms.
- Calendar issue and conversion filings.
Mistakes that create avoidable delay
The following shortcuts frequently create avoidable legal or filing work later.
- Assuming every convertible note qualifies for the startup exception.
- Calling an optionally convertible instrument FEMA equity.
- Ignoring dilution until conversion.
When professional review is useful
A fact-specific review should test the chosen route, evidence and filing sequence before money or customer commitments make a correction expensive.
For a fact-specific review, share the proposed activity, ownership, funding instrument and present stage with Sunny G And Co. at contact@cssunnygupta.com. The scope and professional fee should be agreed only after the facts and required filings are clear.
Related service paths
If the issue involves actual filings or structuring, these service pages describe the relevant scope of work. They do not change the eligibility and approval tests explained above; the right route still depends on the company’s documents and intended activity.
Official sources and last review
This article was last reviewed on 15 September 2026. Rules, portal status and filing practices can change, so check the current authority before acting.
