Your term sheet just landed. Your cap table didn't.
CCDs and convertible notes let you raise now and set the price later. The dilution still comes, at the next priced round.
Summary
- A CCD or a convertible note puts money in the bank without putting a new name on your register of members. Until it converts, the investor holds a debenture or a note, not shares.
- Conversion usually comes at the next priced round, through a cap or discount you agree today, so the dilution still arrives at a price that round sets.
- Before you sign, ask two questions besides the amount: how is this structured, and when does it convert?
Your just landed, and your has not moved. Yet.
That is how compulsorily convertible debentures (CCDs) and convertible notes work. They are two of the most underrated instruments in early-stage fundraising, and most founders miss what happens on day one.
Nothing shows up as new . No new shareholders, no fresh percentages to recalculate, and no valuation conversation you are not ready to have.
What does the investor hold until conversion?
A CCD is a debenture, and the Companies Act defines a debenture as an instrument evidencing a debt. A convertible note records money received as debt, which the holder can have repaid or converted into equity shares. Neither is a share.
Foreign exchange rules label a CCD differently. Held by a non-resident, one that must convert in full is an equity instrument, as the Indian law section explains.
Both convert later, usually at your next priced round, at a valuation cap or a discount you negotiate now. Until that trigger, your register of members, the official record of who owns the company, stays exactly as it is.
Your fully diluted count is another matter. It should carry every unconverted instrument at its conversion terms, and old notes from bridge rounds are what founders most often leave out.
What a CCD or convertible note changes, and when
| What changes | Today, term sheet signed | After conversion, next priced round |
|---|---|---|
| What the investor holds | A CCD or convertible note, not yet shares | Equity shares |
| Register of members | No new name (the graphic's founders and team stay at 100%) | The investor joins as a shareholder |
| Your ownership | Unchanged | Reduced, by an amount set by the round's price and the cap or discount |
| Votes at a general meeting | None for the holder | Those of any equity shareholder |
| What sets the price | The cap or discount agreed today | The next round's price, run through that cap or discount |
| Dilution | Not yet | Happens here |
Four reasons founders raise on convertibles
- You raise without pricing the company too early. The valuation waits until you have the traction that justifies a strong one.
- You close faster. There is no months-long valuation negotiation and no cap table restructuring. The paperwork does not vanish, though: a CCD still needs a special resolution of shareholders.
- You keep control until conversion. Ownership, and the shareholder rights that come with it, arrive only when the instrument converts. The next section sets out how far that goes.
- You let the next priced round do the heavy lifting. By then your metrics do the negotiating, not your desperation.
How much control do you really keep before conversion?
Holding a CCD or a note does not make the investor a shareholder, so they have no vote at your general meetings until conversion. For debentures the Act says so outright: section 71(2) bars a company from issuing debentures that carry voting rights.
That is what the instrument does. The agreement around it can add more. Investors commonly negotiate information rights, a board observer seat, or consent over a list of decisions such as a new raise or a sale.
Those rights apply from the day you sign, whether or not anything has converted. Read them the way you would read reserved matters and the other clauses in any term sheet.
What Indian law requires of each instrument
A CCD is issued under section 71 of the Companies Act 2013. Money a company borrows can otherwise count as a deposit, which companies may take only under tight conditions.
The Companies (Acceptance of Deposits) Rules 2014 exclude debentures that must convert into shares within ten years. Set the conversion date beyond ten years and the exclusion no longer applies.
The convertible note route is built for private companies that DPIIT recognises as startups. DPIIT is the government department that runs startup recognition. Under the same rules, a note is not a deposit if it is ₹25 lakh or more from one person in a single tranche. It must also convert or be repaid within ten years.
Foreign money follows , the foreign exchange law. A non-resident may buy a startup's convertible notes for ₹25 lakh or more in a single tranche. The shares issued on conversion must then meet the sector and pricing rules.
A CCD issued to a non-resident counts as foreign direct investment only if it is fully, compulsorily and mandatorily convertible. One that might not convert is treated as foreign borrowing, under the external commercial borrowing rules.
For a foreign CCD, the conversion formula must also be fixed at issue, and the conversion price cannot fall below fair value at that date. So with a foreign investor, a CCD still needs a valuation on day one, even if it only sets a floor.
Where 15% today and 8% later come from
The arithmetic is worth running before you choose. Here is an illustration with round numbers, not a real deal: an angel writes a ₹2 crore cheque.
- Priced today. At an ₹11 crore , ₹2 crore buys 2 ÷ (11 + 2) of the company, about 15%.
- On a note, six months later. The next round prices the company at ₹30 crore pre-money, and the note carries a 20% discount. It converts as if the valuation were ₹24 crore: 2 ÷ (24 + 2), about 8%.
- On a note, after a weak six months. If that round prices at ₹10 crore instead, the same discount converts it at ₹8 crore: 2 ÷ (8 + 2), or 20%.
Each figure is the angel's stake at the moment their money becomes shares. The new round's own money dilutes everyone after that, in every case. The sums also ignore interest on the note and any employee option pool, and treat the round's pre-money valuation as excluding the note.
This note has no cap. Had it carried one below ₹24 crore, the cap would have set the price instead.
The is not gone. It has moved to the next round, and that round sets the price. You are betting your equity will be worth more, and your hand stronger, by then. If the next round prices lower, the same arithmetic works against you.
The dilution is not gone. It has moved to the next round, and that round sets the price.
Two questions to ask before you sign
If you are heading into a or taking an early cheque from an angel, do not stop at how much they are investing. Ask how the money is structured, and when it converts.
Structure tells you the instrument, the cap, the discount and the rights written into the agreement. The trigger tells you when the dilution lands and at what price. In the illustration, that was the difference between giving away 15% today and 8% six months from now.
For where convertibles sit among the other ways to fund a company, see the Founder's Guide on funding options. Once a round is priced in preference shares, liquidation preference and anti-dilution decide what each holder actually receives.
General guidance, current as at October 2026. It is not legal advice, and the right structure depends on your investor and your sector. Our company secretarial and compliance work covers the resolutions and filings either instrument needs.
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