Early Stage Fundraising Instruments Used by Investors in India (2025)

This article was written by Varshinee AS, Associate, and Karthik Jayakumar, Partner.

What are the typical instruments that investors use in the early stages of fundraise in India?

For most first-time founders, the fundraising journey begins with a flash flood of unfamiliar jargon: CCPS, CCDs, iSAFE notes, venture debt, NCDs, optionally convertible instruments, and perhaps even more, aside of the rights attached to each such instrument.

Each of these terms represents a type of investment instrument, which essentially refers to the manner in which money flows into your company from an investor.

As a founder, you must bear in mind that the instrument you choose determines how ownership, control, and obligations are shared between you and your investors. Understanding the landscape of available instruments is the first step towards negotiating on equal footing, or perhaps – educated footing.

This note serves solely as an introductory guide. We will not delve into the fine print of each structure (we are saving that for later articles, to break them down one-by-one), but it will give you a birds’ eye view of the main categories of investment instruments in India, how they work, and why they are used.

Debt Versus Equity Fundraising Instruments

I keep hearing debt versus equity, what do both mean?

At the highest level, investment instruments fall into two buckets:

• Equity instruments:

  Investors take direct ownership in the company. Their returns would accordingly come from an increase in the company’s value and eventual exit which could be offered in different forms and manners. They accordingly share in the upside but also the risk - if the company fails, their investment may potentially be wiped out. Investor protections are usually governance oriented but are not directed towards assured returns.

• Debt instruments:

  Investors lend money that must be repaid (with interest, or structured returns). Debt investors generally do not take equity risk. They expect regular repayment or exit protections, regardless of whether the company grows in value. The terms associated with such instruments would accordingly also then be geared more towards the direction of capital protection, as the upside is generally capped, and would look a lot more like assured returns (of course, not to be read as that they can’t lose their capital).

Between these two ends of the spectrum lies a hybrid zone of “convertible instruments”. Convertible instruments are essentially debt that converts into equity or preference shares at a future date, based on certain milestones/metrics that investors may frame based on your business’ stage. Many early-stage investments fall into this hybrid category.

What are the different types of equity instruments that exist in the Indian market?

a.      Equity shares

This is perhaps the simplest instrument which reflects pure ownership of the entity. Founders usually hold equity shares. Founders must bear in mind that equity investors rank last in repayment (after creditors (people that your company owes money to) and preference shareholders) but enjoy full participation in the economic upside. As equity shares carry voting rights and such holders benefit from dividends when declared, they are most desired by investors for providing them with the ability to participate in the company’s decision making.

In India, straight equity funding at an early stage is less common, because investors prefer more protections than equity shares alone provide. The typical rights sought by investors, are better attached to preference shares, or a few other instruments such as CCDs.

b.      Preference Shares (CCPS – Compulsorily Convertible Preference Shares)

This is perhaps the closest to the gold standard for venture capital or angel investments in India. CCPS typically gives investors the following:

• A preferential right to get their money back (or more) before equity holders in case of liquidation/liquidity events. Please bear in mind that debt always ranks senior to equity/preference.

• Anti-dilution protection and preferential right to dividends.

Statistics have it that most angel/VC fundraise rounds (at-least early stage) are done through the CCPS route, as it is capable of balancing investor protection and the company’s needs. CCPS is a subset of equity and is capable of having the rights typically attached to equity shares (with its own limitations).

What are convertible instruments/hybrid instruments?

Are there other names they’re known by?

These instruments are especially popular at the seed and early stages, where valuation is hard to fix for a business at such a stage. These instruments allow investors to put in money with the flexibility of postponing the actual pricing of your company to a subsequent fundraise round. Below are some popular convertible instruments/hybrid instruments:

a. CCDs (Compulsorily Convertible Debentures)

CCDs are debt instruments that must convert into equity/preference shares within a specified period. They start as debt (technically), but since conversion is compulsory, regulators often treat them akin to equity.

Investors prefer this route for quick investments, where the key commercial terms are captured, with perhaps a broad understanding of rights upon conversion.

b. Optionally convertible debentures (OCDs), non-convertible debentures (NCDs)

Debt with an option (not compulsion) to convert into equity. Less common in early-stage VC deals (since investors usually want compulsory conversion) but sometimes used in strategic or structured financing scenarios. While NCDs are typically used in the venture debt parlance – of investors lending money to be repaid in a structured manner.

c. SAFE / iSAFE Notes

SAFE (Simple Agreement for Future Equity) was pioneered by Y Combinator in the US. India, however, has a slightly varied mechanism called iSafe (this was pioneered by 100x.vc and perhaps has been widely used thereafter), where the iSafe is essentially a short contract where the investor puts in money now, and gets equity later (at the next funding round) at a discount or capped valuation or such other commercial terms.

Many founders misunderstand that there is no compliance to be undertaken beyond this step of executing an iSafe note – this is untrue. Companies often issue CCDs/CCPS as the underlying instrument.

d.      Convertible notes

This is a route permitted solely for startups registered under DPIIT. This is essentially a loan that converts into equity, when a specific event occurs, and can be subject to specific commercial terms determining the manner in which conversion can occur. This is a lot more nuanced, in having a few preconditions, which we will examine in detail in a separate note.

This instrument is more popular among early investors as they carry fewer compliance requirements such as not having to determine valuation upfront, quick access of funds and delayed dilution for founders.

Other mechanisms of raising funds

Though not technically investment instruments, early-stage founders in India should also know about government grants and schemes – which are often granted by Startup India, state level/state-run funds, organizations.

Grants are typically funds provided by such organizations that set specific milestones/outcomes from such fund utilization. Such grants do not typically expect returns on the deployment of capital, but may have other conditions attached.

Revenue-based financing in India, is another non-equity funding that enables a company to raise capital upfront to later repay it over time, as a fixed percentage of its future revenues or other similar mechanisms. This can be ideal for cash-flow positive startups, as it excludes fixed interest or collateral that are typical in traditional debt transactions.

Conclusion

As a founder, you don’t need to become an expert in understanding all types of securities in the market - but you do need to know the landscape, enough to decide what instrument fits your bill. Instruments are not just legal jargon; they shape your ownership, your risk, and your relationship with investors.

Net-net, every instrument has its pros and cons. You, as a founder, must be smart at picking the right instrument that matches the need of the hour in your scenario. Our future notes will break down each instrument and attempt to examine the pros and cons, to allow you to understand what to watch out for!