Startup Funding · Convertible Notes

Convertible Notes raise early-stage capital quickly with a debt instrument that converts to equity at the next funding round.

A convertible note is a short-term debt instrument that converts into equity shares at a future priced round — allowing startups to raise capital quickly without setting a valuation at the seed stage, while giving investors the benefit of a discount or valuation cap on conversion.

Convertible notes — also known as convertible debentures in the Indian context — are a hybrid funding instrument that begin as debt and convert into equity at a specified trigger event, typically the next qualified funding round. They are popular at the pre-seed and seed stage because they allow founders and investors to defer the valuation conversation until the business has more data to support a defensible price per share.

In India, convertible notes are permitted for DPIIT-recognised startups under a specific FEMA exemption — allowing eligible startups to issue convertible notes to foreign investors for amounts of ₹25 lakh or more, with simplified compliance requirements compared to other foreign investment instruments.

At Beyonte Compliances, we help startups issue properly structured convertible notes — drafting the note agreement, advising on conversion terms, and managing all FEMA, ROC, and RBI compliance requirements from issuance through to conversion.

What Our Convertible Note Service Covers

Convertible Note Agreement Drafting

Drafting the full convertible note agreement — including principal, interest rate, maturity date, discount rate, and valuation cap — tailored to the round structure.

Valuation Cap & Discount Rate Advisory

Advising founders on appropriate valuation cap and discount rate terms that protect investors without excessively diluting founders on conversion.

DPIIT Recognition (if required)

Obtaining or verifying DPIIT recognition, which is a prerequisite for issuing convertible notes to foreign investors under the FEMA exemption.

FEMA Compliance for Foreign CNs

Managing FEMA compliance, RBI reporting, and CN-filing requirements for convertible notes issued to foreign nationals or entities.

Board Resolutions & Approvals

Drafting and passing the board resolutions required to authorise the issuance of convertible notes under the Companies Act.

Conversion Mechanics & Trigger Events

Structuring the conversion mechanics — qualified financing round, long-stop maturity date, and change-of-control provisions — to be fair and unambiguous for all parties.

Conversion to Equity Management

Managing the conversion process at the next priced round — calculating the conversion price, allotting shares, and updating the cap table.

Investor Agreement & Side Letters

Drafting side letter provisions for lead convertible note investors where specific rights or information access are agreed.

Our Process

Round Design & Term Setting

Defining the total raise, individual note amounts, valuation cap, discount rate, interest rate, and maturity date for the round.

DPIIT Status & FEMA Check

Verifying DPIIT recognition and FEMA eligibility for each investor to determine the applicable compliance requirements.

Agreement Drafting & Review

Drafting the convertible note agreement and any side letters, and reviewing with both founder and investor counsel.

Issuance & Compliance Filings

Executing the note agreement, receiving funds, passing board resolutions, and completing FEMA and ROC filings as applicable.

Conversion at Next Round

Calculating the conversion price, allotting shares to note holders at the qualified financing round, and updating all records.

Why It Matters

✓Defers valuation — founders avoid setting a price before enough traction exists

✓Faster to close than an equity round — simpler documentation and fewer negotiations

✓FEMA exemption simplifies foreign investor onboarding for DPIIT-recognised startups

✓Valuation cap gives investors upside protection while preserving founder equity

✓Discount rate rewards early investors without complex equity negotiations at seed stage

✓Properly structured maturity terms prevent forced early repayment or default scenarios

✓No cap table impact until conversion — keeps the record clean during the debt period

✓Compliant conversion process ensures clean equity records post-round for due diligence

Frequently Asked Questions

A convertible note is a short-term debt instrument that converts into equity shares at a future priced funding round rather than being repaid in cash. It carries an interest rate, a maturity date, and typically includes a discount rate or valuation cap that rewards early investors on conversion.

A valuation cap sets the maximum company valuation at which the note converts into equity — protecting investors from excessive dilution if the next round is at a very high valuation. A discount rate allows the note holder to convert at a percentage below the price paid by new investors at the next round, typically 10% to 25%.

Yes. Under the FEMA (Non-Debt Instruments) Rules, DPIIT-recognised startups can issue convertible notes to persons resident outside India for amounts of ₹25 lakh or more per investor. RBI reporting and prescribed conditions must be complied with. This is distinct from the rules applicable to non-recognised companies.

If no qualified financing round occurs before the maturity date, the note typically becomes repayable in cash, or the parties may negotiate an extension or conversion at an agreed valuation. The maturity provisions in the note agreement determine the outcome — which is why careful drafting and a realistic maturity timeline are critical.

Close your seed round quickly with a properly structured convertible note.

Talk to our team about drafting, issuing, and managing convertible notes for your next fundraise.