CCPS vs SAFE vs Equity: An India Primer for Startup Funding

Indian founders often receive a US-style financing document and assume the instrument will work unchanged in an Indian private limited company. That assumption is risky. Indian companies issue recognised kinds of share capital under Companies Act 2013 s.43, preference-share terms are governed by s.55 and the Articles, and foreign investment pricing and conversion are governed by FEMA 20(R) Rule 22. The instrument must fit all three layers. (Companies Act ss.43, 55; FEMA 20(R) Rule 22.)

Why a SAFE does not translate directly

A US SAFE is a contractual right to receive equity in a future financing. It is designed for the law and corporate practice of the issuing jurisdiction. India does not have a generic Companies Act category that makes a US SAFE automatically an equity or debt instrument. The NDI Rules permit capital instruments, including equity shares and fully or mandatorily convertible instruments. A foreign investor therefore needs a structure that fits the permitted instrument framework. (FEMA 20(R) Rule 2 and Rule 22; NDI Rules.)

Convertible notes have a separate treatment for eligible Indian startups, but a SAFE should not be labelled a convertible note without checking eligibility and current FEMA requirements. In practice, Indian venture rounds commonly use CCPS: preference shares that must convert into equity at a specified trigger. (Companies Act ss.43, 55; FEMA 20(R) Rule 22.)

Why CCPS is the Indian standard

CCPS gives the investor a preference share before conversion and a defined conversion path later. The terms can address dividend preference, voting, liquidation preference, anti-dilution and conversion triggers. The Articles must support the statutory rights, while the SHA and subscription documents carry negotiated contractual rights. Preference shareholders generally vote only on matters directly affecting their rights, subject to the statutory exceptions. (Companies Act ss.43, 47, 55; Schedule I Table H.)

For a foreign investor, the conversion price cannot be structured below the applicable fair-value floor at issuance. FEMA 20(R) Rule 22 and the valuation framework for unlisted companies constrain pricing. The exact conversion timeline and treatment of mandatory versus optional instruments should be checked for the instrument actually issued. (FEMA 20(R) Rule 22.)

Liquidation preference: a worked example

Assume an investor invests ₹1 crore and the company exits for ₹3 crore. Under a 1× non-participating preference, the investor chooses the better of the preference return or the amount received on conversion. If the preference is selected, the investor receives ₹1 crore first and ₹2 crore remains for equity holders. This is a contractual waterfall for the transaction, while a formal winding-up has statutory consequences that cannot simply be rewritten by an SHA. (Companies Act ss.43, 55; SHA and Articles.)

Under participating preference, the investor first receives ₹1 crore and then participates in the remaining ₹2 crore according to the negotiated ownership. If the investor owns 33%, the investor receives approximately ₹1 crore + ₹0.67 crore = ₹1.67 crore, leaving approximately ₹1.33 crore for the other holders. A participating preference with a cap limits the total return, for example at 3× invested capital. The cap, participation base, conversion choice and M&A waterfall must be explicit. (Companies Act ss.43, 55; SHA and Articles.)

Anti-dilution

Anti-dilution protects an earlier investor if a later round prices shares lower. Full ratchet resets the old conversion price to the new lower price and is highly investor-friendly. Weighted-average protection moderates the adjustment by considering the existing fully diluted base and the size of the down round. (CCPS terms under Companies Act ss.43, 55; FEMA 20(R) Rule 22.)

A broad-based weighted-average formula is commonly expressed as: NCP = OCP × (FDS + OI) / (FDS + NS). NCP is the new conversion price, OCP the old conversion price, FDS fully diluted shares before the round, OI the old investment amount divided by the old price, and NS the new shares issued in the down round. For example, if OCP is ₹100, FDS is 1,000,000, OI is 200,000 and NS is 100,000, NCP = ₹100 × 1,200,000 / 1,100,000 = approximately ₹109.09. The exact definitions matter more than the label: ask whether the ESOP pool and convertible instruments sit inside FDS. (CCPS terms; SHA definition of fully diluted shares.)

Common founder red flags

First, a term sheet may say “common stock” when the Indian company should be issuing CCPS or another permitted capital instrument. Second, an investor may ask for a full-ratchet adjustment with no pay-to-play condition. Third, a 2× or 3× liquidation preference may be hidden in a long-form document even though 1× non-participating is the usual early-stage reference point. (Companies Act ss.43, 55; FEMA 20(R) Rule 22.)

Fourth, an ESOP pool may be required before the financing. That option-pool shuffle reduces the founders' ownership before the investor's percentage is calculated. Fifth, a foreign-investor term sheet may omit FEMA pricing, FC-GPR and FLA reporting. Sixth, a drag-along clause may have no matching transfer restriction in the Articles. Contractual terms bind signatories, but Articles govern company-level transfer restrictions and must align with the SHA. (Companies Act ss.47, 55, 62; FEMA 20(R) Rule 22; Articles and SHA.)

The founder's review sequence

Start with the instrument: CCPS, CCD or another permitted capital instrument. Then model pre-money, investment, post-money, price per share, issued shares and the ESOP pool. Next read liquidation preference and conversion together; a “1×” headline can still be expensive if participation is uncapped. Finally check Articles alignment, FEMA pricing, foreign-investment filings and the valuation record. (Companies Act ss.43, 47, 55; FEMA 20(R) Rule 22.)

This is a primer, not a substitute for transaction advice. HRA can review the term sheet and build a founder-side dilution and preference waterfall before you sign.

Conversion terms deserve their own page

Do not treat “compulsorily convertible” as a complete answer. The documents should specify the conversion date, event triggers, conversion ratio, treatment on an IPO, treatment on a subsequent financing, and what happens if a trigger never occurs. For a foreign investor, the conversion must remain consistent with FEMA pricing rules and the character of the instrument. (Companies Act s.55(3); FEMA 20(R) Rule 22.)

Voting also needs careful separation. Preference shares have statutory voting limits, while protective provisions and affirmative-consent rights are often contractual. A shareholder agreement cannot remove a Companies Act threshold or turn a contractual veto into a statutory vote. Align the SHA, Articles and board/shareholder resolutions. (Companies Act s.47; Companies Act s.62; SHA and Articles.)

Model more than ownership

A founder spreadsheet that shows only post-money ownership can miss the economic effect of a preference stack. Model at least three exits: a low exit where preference dominates, a middle exit where conversion may be better, and a high exit where participation and caps matter. Then model a down round with the exact BBWA definitions and an ESOP refresh. The same headline ownership can produce very different proceeds. (Companies Act ss.43, 55; SHA waterfall and anti-dilution definitions.)

Finally, ask whether the term sheet is drafted for an Indian company. It should identify CCPS or another permitted instrument, FEMA pricing and reporting where relevant, Articles alignment, and who bears tax, valuation and filing costs. If those basics are absent, pause before negotiating the long-form documents. (FEMA 20(R) Rules 13 and 22; Companies Act ss.43, 55.)