Convertible Note Calculator

Convertible notes and SAFEs serve the same purpose — early-stage investment without setting a valuation — but they differ in important ways:

Convertible note

A debt instrument that accrues interest and has a maturity date. The principal + interest converts into equity at the next round at a discount (and possibly a valuation cap). If the company doesn't raise a round before maturity, the note may become repayable or convert at a pre-agreed valuation.

SAFE

Not a debt. No interest, no maturity date. Converts automatically on a qualifying financing event. Simpler and cheaper to issue, but provides less protection to the investor if the startup never raises a priced round.

When a priced round is raised (e.g. Series A), the convertible note automatically converts. The key terms that determine the conversion:

1. Accrued interest is added to the principal — the investor converts the total (principal + interest), not just the principal.
2. The discount rate gives the investor a reduced price per share compared to the round investors.
3. The valuation cap protects the investor from overpaying if the company's valuation has grown significantly.
4. The investor converts at whichever gives them MORE shares — effectively the lower of the cap-adjusted or discount-adjusted price.

The valuation cap sets a ceiling on the valuation used to convert the note. If the next round's pre-money valuation is ₹25 Cr and the cap is ₹10 Cr, the note converts as if the company were valued at ₹10 Cr. The note holder gets 2.5× the shares a round investor would get for the same money.

Without a cap, the investor only gets the discount (e.g., 20% off the ₹25 Cr valuation). With a ₹10 Cr cap and a 20% discount, the investor gets whichever is lower — in this case, the cap gives a much better deal.

Convertible notes have specific implications under Indian law:

• Convertible notes are treated as debt for tax purposes until conversion — interest is tax-deductible for the company.
• Under FEMA, convertible notes issued to foreign investors must comply with pricing guidelines and the automatic or approval route for FDI.
• Indian company law requires convertible notes to have a maximum tenure of 10 years (under Companies Act) or 5 years (under RBI guidelines for foreign investment).
• Interest accrued but not paid may trigger TDS implications under Section 194A.
• At maturity, if not converted, the principal may be repayable with interest — create a repayment plan in case the priced round is delayed.

Convertible notes are more complex to document than SAFEs in India. Always work with a startup-savvy lawyer for note issuance — the conversion mechanics, interest treatment, and FEMA compliance all need careful structuring.

Use a convertible note when: you need to close quickly without spending 4–8 weeks negotiating valuation; the round size is small (₹25L–₹2 Cr) where legal costs of a priced round would be disproportionate; or you have a clear path to a priced round within 12–24 months.

Consider a priced round when: the investment is large (₹3 Cr+); you have multiple investors who want immediate equity; or you want to set a clean cap table structure from the start.