Convertible Notes for Startups

Convertible notes

Starting a new business can be tough when it comes to getting money to make it happen. But there’s a cool way some startups are using to get funding called a “Convertible Notes,” or CN for short. It’s like a special financial tool that mixes a loan and owns a piece of the company.

Here’s the deal with Convertible Notes: When a startup gets money through a CN, it’s kind of like a loan, but not quite. The startup promises to pay the money back later, but there’s a twist. Instead of paying it back with regular money, they can decide to give the people who lent the money a piece of the company instead.

Now, there are some rules for using Convertible Notes:

1. The startup has to be registered with a place called DPIIT.
2. People who want to lend money using CNs have to give at least Rs 25 lakhs in one go.
3. Only private limited companies can use Convertible Notes.

To get this DPIIT registration, here’s a simple step-by-step guide:

1. You go online and register your business as a startup on the Startup India website.
2. You fill in your name, email, phone number, and password and click “Register.”
3. They’ll send you a code to your email, which you enter to finish setting up your startup profile.
4. After that, you can apply to DPIIT. You fill out a form and send in some documents (good news, there’s no fee for registering).
5. The documents you need include stuff like your company’s registration certificate, proof of any money you got from investors, a letter saying someone in your company can talk for you, and if you have any cool ideas or patents, those too.

Once you send in your application, DPIIT looks it over and if everything’s okay, they give you a recognition certificate. This certificate is like a badge that says, “Hey, we’re a recognized startup!”

But wait, there’s more! When the time comes, you can turn those Convertible Notes into shares of your company. Here’s how:

Changing Convertible Notes into Shares:
When the time’s right, you can turn Convertible Notes into pieces of your company, which are called “shares.” But there are a few steps to make this happen:

  • First, you need your company’s board to agree to give out those shares.
  • You fill out a form called PAS-3 and send it to the government within 30 days of giving out the shares.
  • Finally, you make share certificates and update your list of company owners.

There are some cool things about Convertible Notes too:

  • You can give CNs to different types of people, like folks from other countries, NRIs, people who live in India, and Indian companies.
  • They can be treated like special deposits under a law called the Companies Act 2013.
  • You get to decide when to figure out how much your company is worth, either when you first get the Convertible notes money or when you change them into shares.

So, in conclusion, Convertible Notes (CNs) are a clever way for startups to get money by mixing loans and ownership. By following the rules and getting DPIIT recognition, startups can use CNs to bring in all sorts of investors. Plus, when the time is right, CNs can become shares in the company, making it stronger. If you’re starting a business, CNs could be a cool way to get the funds you need to grow and do awesome things.

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