Article · Startup Advisory & Formation
No Roof, No Limits: Shifting Gears with Startup Convertible Notes
Convertible notes, CCDs and SAFEs exist because both sides would rather defer the valuation question than fight over it too early.
3 min read
Every early-stage round has one unresolved question sitting at its centre: “What is this company actually worth?”
Convertibles - primarily convertible notes, CCDs, and SAFEs (used informally in India) - exist because both sides would rather defer that question than fight over it too early.
Why founders like them
No valuation negotiation at the point of maximum information asymmetry. A pre-revenue company pricing itself in the early months is still guessing. A priced round often means over- or under-selling equity.
Speed and lower transaction cost. A note can close in days. A priced equity round involves valuation reports, extensive SHA/SSA negotiation and board approvals.
Deferred dilution. The cap table does not move until conversion, so the founder is not giving up a defined ownership percentage today for capital raised today.
Why investors like them
Downside protection. Structured as debt until conversion, the instrument typically sits senior to equity in a winding-down - ahead of the founder's common stock.
Upside, secured upfront. A better price later, for risk taken now: the investor converts cheaper than whoever invests next, because they came in first, when it was riskiest.
No illiquid minority equity position to carry - with its accompanying fiduciary and reporting exposure - until the company has actually proven itself at the next round.
The Indian legal architecture
Convertible notes in India are not a generic instrument. They exist only for DPIIT-recognised startups under Section 62(3) of the Companies Act, 2013, must be for ₹25 lakh or more per tranche, and must convert or be repaid within ten years.
Outside these conditions, notes risk being characterised as a deposit under the Companies (Acceptance of Deposits) Rules - a real compliance trap for founders who think they are just signing a “quick note.”
The convertible, in short, is a mechanism for deferring the valuation debate. It lets both sides commit capital now and negotiate price later, with legal guardrails around how “later” is defined.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. Boards should consult qualified legal counsel for company-specific guidance.