Pitfalls of Using Convertible Notes Instruments in India
ā¢ š #ConvertibleNotes, a staple in the Silicon Valley startup ecosystem for deferring valuation talks, face unique challenges in India.
This thread explores why they're not as straightforward here.
ā¢ š Issuance constraints: In India, only DPIIT registered startups can issue convertible notes.
This restriction limits many players, especially as subsidiary entities can't use this route.
ā¢ š§ Investor rights challenges: Unlike in the US, these notes must convert to plain equity shares in India, with no room for preferential rights like liquidation preference upon conversion.
ā¢ ā No redemption options for investors in India if there's no conversion event.
This adds a layer of risk for investors.
ā¢ š§© Dual class equity structures post conversion are seen as a workaround, but it's a complex path even for certified startups in India.
ā¢ šļø SAFE instruments aren't recognized under Indian company law, pushing startups to look at alternatives like traditional equity or compulsorily convertible debentures.
ā¢ š” In conclusion, while convertible notes are conceptually attractive for deferring valuation, the practical challenges and investor rights issues in India make them less feasible.
Traditional instruments might be a safer bet.
ā¢ š¤ To all the #startup founders and #investors out there: What has been your experience with convertible notes in India?
#StartupIndia #VC #PrivateEquity #StartupRegulations #IndiaBusiness #InvestorRights #StartupFunding #FundingChallenges #VentureCapital
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