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How Convertible Notes make fundraising seamless for startups?

Written By

Garima Mitra

Published on

March 1,
2021

Last updated on

August 7, 2025
13:52

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https://treelife.in/startups/how-convertible-notes-make-fundraising-seamless-for-startups/

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AI Summary

A convertible note is a short-term debt instrument that lets startups raise funds without fixing a valuation upfront.
The debt converts into equity at a future date, once the company's valuation is easier to determine.
Convertible notes require only one document, making them faster and cheaper to execute than traditional equity financing rounds.
Convertible notes had no legal recognition in India until 2016.
The Companies (Acceptance of Deposits) Rules, 2014 were amended in 2016 to formally recognise convertible notes as a startup fundraising instrument.
Only DPIIT-registered startups are eligible to raise funds through convertible notes.
Each convertible note must involve an investment of at least INR 25 lakhs.
The note must convert into equity within 10 years of issuance.
Conversion terms must be fixed upfront, letting startups avoid valuation disputes at the early investment stage.

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If you’re a seed or early-stage startup in need of funds for hiring and operations, you may find it difficult to determine a fair valuation. That’s where convertible notes come in.

A convertible note is a short-term debt instrument that startups can use to raise funding. It allows holders to convert their debt into equity in the company at a future date. The biggest advantage of convertible notes for early-stage startups is that they don’t need to determine the value of the company when issuing them.

Unlike traditional equity financing, issuing a convertible note is quick and efficient. There’s only one document to deal with, which saves time and money for both the company and investors.

Until 2016, convertible notes were not legally recognized in India. However, the Companies (Acceptance of Deposits) Rules, 2014 were amended to recognize them as a fundraising instrument for startups.

DPIIT-registered startups can now raise funding through convertible notes, subject to certain conditions. The investment amount must be at least INR 25 lakhs in a single note and converted within 10 years. The terms of conversion must also be determined upfront.

By linking convertible notes to expected returns instead of valuation and percentage of ownership, startups can avoid the valuation quagmire that often comes with very early-stage investments.

About the Author

Garima Mitra

Co-founder | garima@treelife.in

Spearheads Transactions, Contracts, and Compliance verticals. Combines expertise in business law and a passion for social impact to shape the legal and financial ecosystem for startups.

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