Choosing the Right Instrument for Startup Fundraising in India
- Kartikeyan Khator
- Nov 1
- 5 min read
Updated: Nov 3
You finally do it. After months of pitches, updates, and near-misses, an investor says yes. You exhale, text the team, and for a minute it feels like the round is done. Then the docs land in your inbox - and you realize the raise isn’t over; it’s entering a new phase - a different ball game all together. Terms, instruments, rights, preferences…suddenly there’s a lot more to decide than just “how much.”
This is when you have to pick the lane you’ll run in: convertible or priced equity.
Convertibles (iSAFE/Convertible Notes/CCDs) are about speed and flexibility - great when your story is still unfolding and you’d rather not arm-wrestle over valuation today.
Priced equity (usually CCPS in India) is about planting a flag - locking in valuation, rights, and a clear governance stack when you’re ready to scale with institutions.
The right choice depends on where you are and how you like to operate. Let's break it down...
Which instruments are commonly issued by Startups in India for equity fundraise?
A. Convertible Instruments (iSAFE i.e. Indian adapted version of SAFE notes which are commonly used by early-stage startups in the US):
Convertible Notes (specifically available to DPIIT registered startups) - A debt-flavoured note that may convert into equity or be repaid within a prescribed period (maximum 10 years), at the option of the holder of the instrument. The price for conversion into equity is usually a discount on the price of a future qualified financing, with a valuation cap and floor. Minimum ₹25 Lakhs per investor must be raised through Convertible Notes, as per Indian Law.
May carry interest but typically nominal
Negotiation with investors is usually on the conversion formula, valuation cap and floor, qualified financing definition and the optionality to convert.
Involves less complex documentation and potentially lower legal costs, making it faster to issue compared to CCD and CCPS
Unlike CCD and CCPS, Convertible Notes can be issued by LLPs also
Compulsorily Convertible Debentures (CCD) or Compulsorily Convertible Preference Shares (CCPS) - Issued as debentures/preference shares that must compulsorily convert into equity shares based on a pre-determined price or ratio within a defined period. The pre-determined price or ratio is usually based on a discount on the price of a future qualified financing, with a valuation cap and floor, similar to Convertible Notes.
Unlike Convertible Notes, CCDs or CCPSs do not have any minimum limit on the amount to be raised
They typically do not include any interest or dividend
CCDs must compulsorily convert within 10 years to avoid being classified as deposits as per Indian Law. CCPSs have a maximum tenure of 20 years as per Indian Law.
CCDs and CCPSs are relatively more complex and time consuming to issue as compared to Convertible Notes, but are still practically easy to issue.
Negotiation with investors is usually on the conversion formula, valuation cap and floor, qualified financing definition and investor rights.
B. Priced Instruments:
Compulsorily Convertible Preference Shares (CCPS) - The standard instrument for priced rounds in India is CCPS. They carry liquidation preference, anti-dilution, pro-rata, voting/consent rights, and mandatory conversion to equity on triggers. This is the default and most preferred instrument for institutional rounds in India. Priced CCPS carry a 1:1 conversion right, unless the anti-dilution right kicks in down the line.
Equity Shares - Straight common equity. Clean but offers investors fewer protections versus CCPS. Used for insider rounds like friends and family, or onboarding new co-founders, or adjusting founders' stakes, to keep things simple. Uncommon for institutional rounds.
Which instruments are suited best based on the stage of fundraise and nature of investor?
A. Pre-Seed (idea ↔ MVP; limited metrics; speed matters)
Best fit: Convertible instruments
Why: Fast docs, no immediate valuation debate, founder-friendly close
Suited for: Indian angel investors, incubators, accelerators and some angel funds (Micro VCs) are comfortable
Avoid: Heavy rights packages or complex priced rounds unless you have clear traction and investor demand
B. Seed (MVP live; early users/revenue; heading toward PMF)
Best fit: Convertible instruments if you want to defer valuation; Priced CCPS if you have enough data to set a number.
Why: If traction is forming but volatile, convertible instruments keep momentum. If metrics and lead interest are strong, priced CCPS cleans up the cap table and signals maturity.
C. Bridge/Extension/Pre-Series (hitting specific milestones)
Best fit: Convertible instruments
Why: You’re buying time to hit the next proof points; minimize negotiation cycles, protect runway, avoid premature repricing.
D. Series A (clear traction, repeatability; institutional round)
Best fit: Priced CCPS
Why: Institutional investors expect a priced round with standard rights: liquidation preference, anti-dilution, board/consent matters, ESOP expansion, etc.
Series B and Beyond (scaling; multi-investor syndicates)
Best fit: Priced CCPS
Why: Complex rights stacks and governance require CCPS
Summarizing
Here's a comparison table summarizing which instrument is best suited for each stage:
Stage | Investor Type | Best-fit Instrument | Speed & Complexity |
Pre-seed | Angels, Incubators, Accelerators | Convertible Notes | Fast, simple docs |
Angel Funds (Micro VCs) and VCs | CCD/CCPS with deferred pricing (some VCs only prefer priced CCPS) | Moderate | |
Seed | Angels and VCs | If not enough traction to set a price - CCD/CCPS with deferred pricing (some VCs only prefer priced rounds) | Moderate |
Priced CCPS | Heavier (standard for VC rounds) | ||
Bridge Rounds | Angels and VCs | CCD/CCPS with deferred pricing | Moderate |
Series A, Series B and beyond | Institutional (VCs and Family Offices) | Priced CCPS | Heavier (standard for VC rounds) |
Insider rounds | Friends and family, new co-founder | Equity Shares | Simple |
All in all, think of instruments as tools, not trophies - use the one that gets you to your next milestone with the least friction and the most momentum. There’s no hard-and-fast rule. Choose the instrument that suits your stage, speed, investor mix, and compliance comfort. That said, don’t stray too far from market norms - it can spook investors and slow you down. Early on, convertibles help you close quickly and prove traction. Once you have repeatability, priced CCPS becomes the standard. Use Venture Debt or Revenue Based Financing as smart complements to stretch runway and reduce dilution.
Startup Indian can support founders and ventures in the following ways:
Fundraise Preparation - Pitch Deck, Financial Model, When-How Much-Whom to Raise From, Deal Documentation and more. Know more here.
Business Valuation - Adopt multiple methods attuned to startup stage, to negotiate better with investors. Know more here.
Fundraising (as Investment Bankers) - Leverage our network to reach out to investors, lead conversations on your behalf, deal negotiation and closure. Know more here.
Shared CFO - Finance function handholding, top notch governance, internal controls, ongoing financial planning and more. Know more here.
This article featured in our Founder's Playbook which answers questions around startup fundraising - when, how much, at what price, and more. You can access the Playbook here.
