Fundraising9 min read

SAFE vs iSAFE vs Convertible Note: What Indian Founders Should Use (2026)

Cleya Team

Founder Guides · 8 November 2026

If you're raising a first cheque in India, someone will eventually say "just do a SAFE". It's good advice in the US. In India it needs a translation, because Indian company law doesn't have a category for a US-style SAFE. What founders actually use here are instruments that fit the categories the law does recognise: convertible notes, and SAFE-like agreements structured as compulsorily convertible preference shares (CCPS), such as the iSAFE.

This guide explains what each instrument is, which ones an Indian private company can actually use and why, the terms you'll negotiate, and what changes when the investor is outside India. It links to the sources we relied on at the end.

This is general information, not legal or tax advice. Rules change, and the right structure depends on your company, your investors and where they're based. Talk to a lawyer and a chartered accountant before you sign anything.

The short answer

•US-style SAFE: generally not used as-is by Indian companies. It doesn't fit an instrument Indian law recognises, which creates deposit and FEMA risk.

•Convertible note: recognised for DPIIT-recognised startups, with a minimum of ₹25 lakh from one person in a single tranche, converted or repaid within ten years.

•iSAFE (CCPS): a SAFE-style agreement that is legally a preference share. It works for smaller cheques too, but brings share-issue paperwork and, in many cases, a valuation.

What each instrument is

SAFE (Simple Agreement for Future Equity). Created at Y Combinator in 2013. YC describes it as a short contract that lets an investor fund a company now in exchange for shares later. It is not debt: no interest and no maturity date. It converts into shares automatically when the company raises a priced round. YC's post-money SAFE has been its standard since 2018, and YC publishes versions with a valuation cap, a discount, or a most-favoured-nation (MFN) clause.

Convertible note (India). Under Indian rules, a convertible note is an instrument issued by a startup company evidencing receipt of money initially as debt, which is repayable or convertible into equity shares within a set period. It starts life as debt and is meant to become equity.

iSAFE (India Simple Agreement for Future Equity). Introduced by the Indian early-stage fund 100X.VC in July 2019. 100X.VC states that an iSAFE is not a debt instrument and that it takes the legal form of compulsorily convertible preference shares (CCPS) to comply with Indian law. Its published version converts into equity on specified events, such as the next priced round, or at the end of three years from issue, whichever is earlier. 100X.VC publishes variants with a valuation cap and discount, a cap only, a discount only, and MFN.

Why a US SAFE doesn't travel well to India

The Companies Act, 2013 recognises a defined set of instruments, including equity shares, preference shares and debentures. A US SAFE is none of these. Law firm Khurana & Khurana describes it as fitting "no Indian category", with the risk that it is treated as a deposit under the Companies Act or as a non-compliant instrument under FEMA if foreign money is involved. Vinod Kothari Consultants make a similar point: plain SAFEs didn't gain traction in India because they were neither debt nor equity nor another recognised instrument.

Courts also look at substance over labels. Calling a document a "SAFE" doesn't change how a regulator will classify the money you received. That's why the Indian versions are built on top of instruments the law already recognises.

Convertible notes: the legal basis

The convertible note route rests mainly on the Companies (Acceptance of Deposits) Rules, 2014. Ordinarily, money a company receives can count as a "deposit" under these rules, which brings a heavy compliance burden. The rules exclude convertible notes issued by startups from that definition, as long as:

•the company is a startup recognised by DPIIT;

•the amount is ₹25 lakh or more, from a single person, in a single tranche; and

•the note is converted into equity or repaid within ten years of issue. This was extended from five years in September 2020.

Two practical consequences:

Small cheques don't fit. A ₹5 lakh angel cheque can't use the convertible note route, because it falls below the ₹25 lakh threshold.
It's still debt until it converts. If the note isn't converted within the period, it has to be repaid, which is a real obligation on the company.

For a domestic investor, the convertible note is the one route that can genuinely postpone valuation, according to Khurana & Khurana. Other routes, including iSAFEs and notes taken by foreign investors, generally still need one.

iSAFE (CCPS): the legal basis

Because an iSAFE is legally a preference share, it follows the Companies Act rules for issuing shares, mainly sections 42 (private placement), 55 (preference shares) and 62 (further issue of capital), with the related rules on share capital and allotment. In practice that typically means:

•Your Articles must allow it, and shareholders pass a special resolution to issue preference shares.

•Preference shares have a maximum tenure of 20 years under section 55(2). The 100X.VC template converts much sooner (on a priced round, or at three years).

•Authorised and paid-up capital go up by the amount invested, as 100X.VC notes.

•A valuation is usually still needed. The SAFE-style terms decide the conversion price later, but the share issue itself typically needs a valuation now.

The benefit is flexibility. There's no ₹25 lakh minimum, and the instrument is equity from day one rather than debt. Another variant some companies use is the compulsorily convertible debenture (CCD), which Vinod Kothari notes can also be used for a SAFE-like structure.

The terms you'll actually negotiate

Whichever instrument you choose, the economics usually come down to the same few terms:

•Valuation cap. YC defines it as "the highest valuation at which a SAFE converts". If your next round is priced above the cap, early investors convert as if it were priced at the cap.

•Discount. Early investors convert at a lower price than new investors in the next round. YC notes that "discounts are commonly 10–20%" for US SAFEs. Indian terms vary, so don't treat that range as a benchmark here.

•MFN (most favoured nation). No cap or discount, but if you later give someone better terms, this investor gets them too.

•Conversion triggers and long-stop. What forces conversion (a priced round, a sale, a set date) and what happens if none of those occurs.

A simplified example (illustrative, ignores dilution mechanics): an angel puts in ₹50 lakh with a ₹10 crore cap. Eighteen months later you raise a priced round at ₹20 crore. Because the round is above the cap, the angel converts at the ₹10 crore price, so their ₹50 lakh buys roughly twice as many shares as it would at the round price. Run the real numbers with your lawyer or CA, because pre-money vs post-money caps change the result.

When the investor is outside India (FEMA)

Foreign money brings in the Foreign Exchange Management Act (FEMA), the Non-Debt Instruments (NDI) Rules, and the RBI's Master Direction on Foreign Investment in India. At a high level:

Convertible notes from non-residents

•Only startups recognised by DPIIT can issue them to non-residents.

•The investment must be ₹25 lakh or more in a single tranche, and the RBI's Master Direction now describes conversion within ten years from issue.

•Not permitted for individual citizens of, or entities registered in, Pakistan or Bangladesh.

•If your sector needs Government approval for foreign investment, issuing a note to a non-resident needs that approval too.

•The company reports the investment to its bank in Form CN, within 30 days of receiving the money.

CCPS (including iSAFE) from non-residents

•FEMA counts preference shares as equity instruments only if they are fully and mandatorily convertible.

•The price or conversion formula must be fixed upfront at the time of issue, and the conversion price can't be lower than the fair value at the time the instrument is issued.

•The issue is reported in Form FC-GPR within 30 days of allotment.

That fair-value floor matters for SAFE-style terms. A steep discount that pushes a foreign investor's conversion price below fair value could breach FEMA. Get your conversion formula checked before you sign.

Tax, at a high level

•Angel tax. Section 56(2)(viib) of the Income-tax Act taxed share premium above fair market value. In the Union Budget 2024–25, the Finance Minister proposed abolishing it for all classes of investors, and it no longer applies from Assessment Year 2025–26. Valuation still matters for other reasons, including FEMA pricing and other tax provisions, so keep a valuation report on file.

•Conversion. Converting preference shares (or debentures) into equity shares is not treated as a "transfer" under section 47 of the Income-tax Act, so the conversion itself isn't a capital gains event.

Tax treatment depends on the facts of each deal. Your CA should sign off on the structure.

Side-by-side comparison

	US-style SAFE	Convertible note (India)	iSAFE (CCPS)
Legal form	Contract for future equity	Debt until conversion	Preference shares
Recognised category in India?	No	Yes, for DPIIT startups	Yes
Minimum cheque	n/a	₹25 lakh, single tranche	No statutory minimum
Time limit	No maturity (US)	Convert or repay within 10 years	Converts on events or at 3 years (100X.VC template); max 20 years by law
Valuation at issue	No	Can be postponed for domestic investors	Usually needed
Foreign investors	Not a recognised FEMA instrument	Allowed with conditions; Form CN	Allowed if fully convertible; price fixed upfront; Form FC-GPR
Paperwork	Light (US)	Moderate	Heavier: Articles, special resolution, share allotment

Which should you use?

•A large cheque (₹25 lakh or more) from one investor, and you're DPIIT-recognised: a convertible note is worth considering, especially for domestic money where it can postpone valuation.

•Several smaller angel cheques: an iSAFE or another CCPS structure is the more common fit, since convertible notes need ₹25 lakh per investor per tranche.

•A foreign investor: both routes are possible, but FEMA pricing, sector rules and reporting apply. Involve a lawyer early.

•An investor sends you a US SAFE template: don't sign it as-is for an Indian company. Ask your lawyer to map its economics onto an Indian instrument.

Once you know the instrument, the harder part is still finding investors who fit your stage. Our seed fundraising guide covers the process, and how angels evaluate pre-seed startups covers what they'll look at, including the round terms.

Talk to a lawyer

This guide is a map, not a contract. The rules above come from regulations and professional commentary, and they change. The convertible note time limit, for example, has already been extended once. Before you raise, get a startup lawyer to choose and draft the instrument, and a chartered accountant to handle valuation, tax and filings. A few hours of advice now is far cheaper than unwinding a non-compliant round later.

Find investors who fit

Cleya helps Indian founders meet investors who match their stage, sector and thesis. It proposes a few introductions at a time, each with the reason it's a fit, and contact details are shared only when both sides accept, or when a Cleya curator introduces you directly.

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