Raising funds is the lifeblood of every startup—fuelling growth, innovation, and survival. But cash doesn’t just appear; it comes through securities, financial instruments that startups issue to investors in exchange for capital. From equity stakes to debt promises, the options are vast and varied. Which one fits your startup’s vibe? In this blog, we’ll explore the types of securities startups can use to raise funds, breaking them down with flair and real-world insights—because at The StartupLab, we’re all about turning funding into your superpower!

What Are Securities in Startup Funding?

Securities are tradable financial assets startups offer to investors—think shares, bonds, or hybrid deals. They’re governed by laws like the Companies Act, 2013, and SEBI regulations in India, balancing founder control with investor appeal. Whether you’re wooing angel investors or pitching VCs, picking the right security can make or break your fundraising game. Let’s dive into the lineup!

Types of Securities for Startups

1. Equity Shares (The Ownership Play)

• What: Investors buy ownership stakes—common or preference shares—in your company.
• Why: Perfect for long-term believers who want a slice of your success pie.
• How: Issue shares via private placement (Form PAS-3) or rights issue.
• Pros: No repayment pressure; aligns investors with your vision.
• Cons: Dilutes founder control; dividends (if any) cut profits.
• Catchy Tip: Equity’s your MVP—offer it to those who’ll cheer your wins!
• Example: Zomato issued equity to Info Edge early on, reaping massive returns at IPO.

2. Preference Shares (The VIP Pass)

• What: Shares with priority in dividends and liquidation—often convertible (CCPS).
• Why: Attracts cautious investors who want perks without full equity risk.
• How: Define terms (dividend rate, conversion) in a shareholder agreement.
• Pros: Delays dilution (if convertible); fixed returns appeal to risk-averse funders.
• Cons: Dividend obligations can strain cash flow.
• Catchy Tip: CCPS is the VIP lounge—invite investors who love a safety net!
• Example: Flipkart used CCPS to lure VCs before its Walmart buyout.

3. Compulsory Convertible Debentures (CCDs) (The Debt-to-Equity Twist)

• What: Debt that converts to equity after a set period or event.
• Why: Blends debt’s tax perks with equity’s upside—ideal for bridge rounds.
• How: Issue via board/shareholder approval; file Form CHG-9 if secured.
• Pros: Tax-deductible interest; delays dilution until conversion.
• Cons: Interest payments pinch cash until conversion.
• Catchy Tip: CCDs are the chameleon—debt today, equity tomorrow!

4. Non-Convertible Debentures (NCDs) (The Pure Debt Deal)

• What: Bonds that don’t convert—pure debt with fixed interest.
• Why: Appeals to lenders who want steady returns without ownership.
• How: Issue privately or publicly (rare for startups); comply with SEBI norms.
• Pros: No dilution; tax-deductible interest.
• Cons: Repayment burden—tough for cash-strapped startups.
• Catchy Tip: NCDs are old-school cool—use them if cash flow’s your jam!

5. Convertible Notes (The Quick-Flex Option)

• What: Short-term debt that converts to equity in the next funding round.
• Why: Fast, flexible funding for early-stage startups without set valuations.
• How: Draft a note with discount rate (e.g., 20%) and cap; popular in angel deals.
• Pros: Speedy; delays valuation debates.
• Cons: High interest if not converted; dilution later.
• Catchy Tip: Convertible notes are the speed date of funding—seal the deal fast!
• Example: Many Y Combinator startups use notes for seed cash.

6. SAFEs (Simple Agreement for Future Equity) (The Modern Maverick)

• What: A promise of future equity without debt—pioneered by Y Combinator.
• Why: Simple, founder-friendly, and skips interest or repayment.
• How: Sign a SAFE with a valuation cap or discount; converts at the next round.
• Pros: No debt burden; quick to execute.
• Cons: Less common in India; legal gray area locally.
• Catchy Tip: SAFEs are the rebel yell—bold, fast, and founder-first!

7. Warrants (The Bonus Bet)

• What: Rights to buy shares later at a fixed price, often bundled with other securities.
• Why: Sweetens deals for investors, encouraging bigger bets.
• How: Attach to equity/debt deals; define exercise terms.
• Pros: Low upfront cost; boosts investor confidence.
• Cons: Future dilution if exercised.
• Catchy Tip: Warrants are the cherry on top—tempt investors to go big!

Which Security Suits Your Startup?

How Startups Pick the Right Security

1. Stage Matters: Seed startups love convertible notes/SAFEs; Series A leans toward CCPS/CCDs.
2. Investor Appetite: Angels may take equity; VCs prefer preference shares.
3. Cash Flow: Tight budget? Avoid NCDs—opt for equity or convertibles.
4. Control: Want to delay dilution? CCDs or SAFEs are your allies.

Real-World Funding Wins

1. Swiggy’s CCPS Magic

• What: Raised $1 billion in 2018 via CCPS from Naspers and others.
• Why: Delayed dilution while scaling fast.
• Impact: Valuation soared to $10 billion by 2022.
• Lesson: CCPS buys time for hyper-growth!

2. Byju’s Equity Play

• What: Early equity rounds from Sequoia and others.
• Why: Built a war chest for acquisitions.
• Impact: $22 billion valuation peak in 2022.
• Lesson: Equity fuels bold bets!

Pro Tips for Raising Funds

• Know Your Worth: Get a valuation—don’t undersell your startup!
• Tailor the Pitch: Match securities to investor goals—angels vs. VCs differ.
• Stay Legal: File MCA/SEBI forms on time—penalties sting!

Conclusion

From equity shares to SAFEs, the securities startups use to raise funds are as diverse as their dreams. Each offers a unique mix of risk, reward, and runway—whether you’re chasing quick cash or long-term loyalty. Swiggy, Byju’s prove it: the right security can catapult you to success. Ready to fund your startup’s next chapter? Contact The StartupLab—we’ll match you with the perfect security to soar!

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