CCD vs CCPS: Which One Should Your Startup Choose?
When raising funds, startups often encounter complex financial instruments like CCD (Compulsory Convertible Debentures) and CCPS (Compulsory Convertible Preference Shares). Both are popular tools for securing investment, but they serve different purposes and come with unique implications for founders and investors alike. If you’re an entrepreneur navigating fundraising options in India, understanding the distinction between CCD and CCPS is crucial to making informed decisions. In this blog, we break it down for you—simplified, actionable, and startup-focused.
What Are CCDs and CCPS?
Compulsory Convertible Debentures (CCDs)
CCDs are debt instruments issued by a company that must convert into equity shares after a specified period or upon a predefined event. Think of them as a hybrid—starting as a loan but eventually transforming into ownership stakes. They’re governed under the Companies Act, 2013, and are widely used by startups to attract investors without immediate equity dilution.
Compulsory Convertible Preference Shares (CCPS)
CCPS, on the other hand, are preference shares that convert into equity shares mandatorily at a set time or condition. Unlike regular shares, CCPS holders get priority in dividend payouts and liquidation proceeds, making them attractive to cautious investors. They’re also regulated under the Companies Act, 2013, and are a go-to for startups balancing control and capital.
CCD vs CCPS: A Side-by-Side Comparison
| Aspect | CCD (Compulsory Convertible Debentures) | CCPS (Compulsory Convertible Preference Shares) |
|---|---|---|
| Nature | Debt instrument that converts to equity | Preference shares that convert to equity |
| Investor Appeal | Debt-like security with interest | Equity-like with dividend preference |
| Conversion | Mandatory after tenure or event | Mandatory after tenure or event |
| Tax Implications | Interest paid is tax-deductible | Dividends are not tax-deductible |
| Control | No voting rights until conversion | Limited or no voting rights until conversion |
| Priority in Repayment | Ranks below secured creditors | Higher priority than equity shareholders |
| Cost to Company | Interest payments until conversion | Dividend obligations (if declared) |
Key Differences Explained
1. Debt vs Equity Structure
- CCD: Starts as debt, offering investors a fixed interest rate until conversion. This appeals to risk-averse investors who want returns before taking an equity stake.
- CCPS: Begins as equity with preferential rights, ensuring investors get dividends or liquidation proceeds ahead of common shareholders.
2.Tax Benefits
- CCD: Interest payments are tax-deductible for the company, reducing taxable income—a big plus for cash-strapped startups.
- CCPS: Dividends aren’t tax-deductible, which can increase the financial burden if dividends are committed.
3. Control and Dilution
- Both instruments delay equity dilution until conversion, preserving founder control in the short term. However, CCPS holders may negotiate preferential rights (e.g., anti-dilution clauses), while CCDs focus on debt-like terms.
4. Investor Preference
- CCD: Favoured by investors seeking a safety net (interest) before converting to equity.
- CCPS: Preferred by those wanting priority in payouts and a stronger equity position post-conversion.
Which One Should Your Startup Choose?
The choice between CCD and CCPS depends on your startup’s goals and investor expectations:
- Opt for CCDs if: You want to leverage tax benefits, minimize immediate equity dilution, and attract debt-friendly investors. Ideal for early-stage startups with uncertain cash flows.
- Go for CCPS if: You’re dealing with investors who prioritize dividends or liquidation preference, or if your startup has a stable revenue model to support potential payouts.
At The StartupLab, we’ve guided numerous founders through this decision. For instance, a tech startup we supported chose CCDs to secure a bridge round, benefiting from tax deductions while finalizing their Series A terms. Another opted for CCPS to align with an investor’s preference for priority returns.
Legal and Practical Considerations
- Regulatory Compliance: Both CCDs and CCPS require adherence to the Companies Act, 2013, and FEMA regulations (for foreign investors). Proper documentation is key—think term sheets, shareholder agreements, and conversion timelines.
- Valuation Impact: Conversion terms (e.g., price per share) can affect your startup’s valuation. Negotiate wisely!
- Expert Guidance: Unsure where to start? Consultancies like ours at The StartupLab can streamline the process, from structuring deals to filing paperwork.
Conclusion
CCDs and CCPS are powerful tools in a startup’s fundraising toolkit, each with distinct advantages. CCDs offer flexibility and tax perks, while CCPS provide investor security and equity alignment. By understanding their differences, you can pitch the right option to investors and fuel your startup’s growth without losing sight of control or compliance.
Need help choosing between CCD and CCPS for your fundraising round? Contact The StartupLab today—our experts are here to turn your funding vision into reality!
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