Introduction
When raising capital for your startup, the choice between Compulsory Convertible Debentures (CCDs) and Compulsory Convertible Preference Shares (CCPS) can significantly impact your company's financial structure, founder control, and investor relationships. Both are hybrid instruments that bridge the gap between traditional debt and equity, but they serve different strategic purposes and appeal to different types of investors at various stages of your startup journey.
Quick Answer: CCDs are debt instruments that convert to equity within 10 years, offering tax-deductible interest payments and deferred dilution ideal for bridge rounds and early-stage funding when valuation is uncertain. CCPS are preference shares that convert to equity within 20 years, providing liquidation preference and dividend priority preferred by institutional investors from Series A onwards for their protective rights and clearer ownership structure.
About the Author
Parth Shah is the Founder and Team Leader of My Valuation, an IBBI Registered Valuer for Securities or Financial Assets under Section 247 of the Companies Act, 2013. He holds multiple distinguished qualifications including Licensed Certified Public Accountant (CPA) in the U.S., Fellow Chartered Accountant (FCA), and specializes in complex securities valuations including CCDs, CCPS, warrants, and 409A valuations.
Key Features of CCPS
Liquidation Preference: In the event of liquidation, CCPS holders have priority over common equity shareholders but rank after secured creditors. Under Section 53 of the Insolvency and Bankruptcy Code (IBC), preference shareholders rank fourth in the waterfall after secured creditors, workmen dues, and unsecured creditors, but before equity shareholders.
Dividend Rights: CCPS holders receive dividends before equity shareholders. These can be structured as fixed dividends (e.g., 8% per annum), cumulative dividends (accumulate if not paid), or participating dividends.
Board Representation: CCPS agreements often include protective provisions such as the right to appoint directors, veto rights on major decisions, and information rights.
CCD vs CCPS: The Fundamental Differences
Comparison Table: CCD vs CCPS
| Parameter | CCD (Compulsory Convertible Debentures) | CCPS (Compulsory Convertible Preference Shares) |
|---|---|---|
| Legal Nature | Debt instrument until conversion | Equity instrument from day one |
| Balance Sheet Classification | Liability (debt side) | Share capital (equity side) |
| Accounting Standard | Compound financial instrument (Ind AS 109) | Equity with preference rights (Ind Ind AS 32) |
| Maximum Tenure | 10 years (RBI guideline) | 20 years (30 for infrastructure companies) |
| Interest/Dividend | Fixed interest paid to holders | Dividends paid (if declared) |
| Liquidation Priority | Creditor status (pre-conversion) | Priority over equity, after debt |
| On Cap Table | Not reflected until conversion | Appears immediately upon issuance |
| Voting Rights | None (as it's debt) | Limited (on specific resolutions) |
| Anti-Dilution Protection | Can be negotiated | Commonly included |
| Regulatory Framework | Section 71, Companies Act 2013 | Sections 42, 55, 62, Companies Act 2013 |
| FDI Classification | Equity for FDI purposes | Equity for FDI purposes |
| Valuation Certificate | Required from Cost Accountant | Required from Cost Accountant |
| ROC Filing | Form PAS-3 within 15 days | Form PAS-3 within 30 days |
| Typical Use Case | Bridge rounds, unpriced rounds | Series A+, institutional rounds |
| Investor Type | Angels, HNIs, early-stage VCs | Institutional VCs, PE funds |
| Conversion Trigger | Time-based or event-based | Milestone-based (funding round, IPO) |
Why Institutional Investors Prefer CCPS ?
In 2026, CCPS has emerged as the default instrument for institutional venture capital in India, with over 80% of Series A and beyond rounds structured using CCPS rather than CCDs.
1. Liquidation Preference Protection
When a startup fails or exits at a lower valuation, CCPS holders recover their investment before common equity shareholders.
Example: If a startup raises ₹10 crores at ₹100 crore valuation via CCPS and later exits for ₹50 crores, CCPS holders recover their ₹10 crores first. Remaining ₹40 crores is distributed among equity holders.
2. Clearer Cap Table Visibility
Unlike CCDs which remain off the cap table until conversion, CCPS appear as shareholders from day one. This transparency matters for future fundraising rounds, ESOP pool calculations, and exit negotiations.
3. Anti-Dilution Protection
CCPS terms typically include ratchet provisions either full ratchet or weighted average that protect investors if the company raises a down round.
4. No Debt Overhang Concerns
Since CCPS is equity from inception, it doesn't burden the company's debt capacity, which matters for future debt financing, banking relationships, and credit ratings.
When to Choose CCD Over CCPS ?
Scenario 1: Bridge Rounds with Uncertain Valuation
Use Case: Your startup needs ₹2-3 crores to extend runway while closing a larger Series A round, but you haven't agreed on valuation yet.
Why CCD Works: Issue CCDs with a conversion discount (15-25%) tied to the next funding round.
Example: ₹2 crore CCD with 20% discount. If Series A values the company at ₹100 per share, CCD holders convert at ₹80 per share, receiving 25% more shares.
Scenario 2: Founder-Friendly Interim Financing
CCDs don't appear on your cap table until conversion, keeping ownership structure clean for ESOP grants and board discussions. Interest payments are predictable and can be budgeted.
Scenario 3: Strategic Investor Participation
CCDs allow strategic investors to support your company financially while deferring the complexities of formal shareholding until conversion at a later stage.
Scenario 4: Regulatory or Ownership Constraint Situations
Since CCDs are debt pre-conversion, they don't immediately affect foreign investment caps or ownership percentages in industries with FDI restrictions.
Stage-Specific Recommendations
Pre-Seed & Seed (₹25 lakhs - ₹2 crores)
Recommended: CCDs or Convertible Notes
Why: Valuation is highly uncertain, documentation is simpler, angel investors are comfortable with CCDs, and it keeps cap table clean for future institutional rounds.
Angel Round (₹2-5 crores)
Recommended: CCDs (preferred) or CCPS (if sophisticated angels)
Why: Still significant valuation uncertainty, HNI/angel investors value tax efficiency, and this bridges to institutional capital.
Series A (₹5-15 crores)
Recommended: CCPS (strongly preferred)
Why: Institutional VCs require protective provisions only CCPS provides. Liquidation preference is non-negotiable for most funds.
Series B & Beyond (₹15+ crores)
Recommended: CCPS (exclusively)
Why: All institutional investors expect CCPS at this stage. Multiple protective provisions are layered across series.
Common Mistakes Founders Make
Mistake 1: Choosing Based Only on Investor Preference
Don't accept CCPS just because a VC demands it. For small bridge rounds (₹1-2 crores), negotiate for CCDs that convert to CCPS at the next significant round.
Mistake 2: Ignoring the Cap Table Impact
Maintain a fully-diluted cap table showing post-conversion ownership for all outstanding CCDs. Use this when discussing with new investors to avoid surprises.
Mistake 3: Misunderstanding Liquidation Preference
If accepting participating CCPS, negotiate a 2-3x participation cap. Beyond this multiple, investors convert to common equity rather than taking both preference and participation.
Mistake 4: Overlooking Interest Payment Obligations
Structure CCDs with low or zero interest (0.001%) and compensate investors with higher conversion discounts (20-25%) if you lack cash flow for interest payments.
Mistake 5: Not Planning the Conversion Event
Define crystal-clear conversion triggers. For CCDs: "Upon closing of qualified financing round of minimum ₹X crores." For CCPS: "Upon IPO, acquisition, or specific milestone."
Decision Framework: 5 Questions to Answer
Question 1: What is your current stage and funding amount?
- Seed/Angel (< ₹5 crores): CCDs or Convertible Notes
- Series A (₹5-15 crores): CCPS strongly recommended
- Series B+ (₹15+ crores): CCPS exclusively
Question 2: Have you agreed on company valuation?
- Yes: CCPS
- No: CCDs with conversion discount
Question 3: What type of investor?
- Angels/HNIs: CCDs acceptable
- Institutional VCs/PE: CCPS expected
- Strategic Corporates: CCDs initially, convert to CCPS later
Question 4: How critical is liquidation preference?
- Highly critical: CCPS mandatory
- Less critical: CCDs sufficient
Question 5: What is your financing timeline?
- Need capital immediately, larger round in 6-12 months: CCDs
- This is main round, next fundraise 18-24 months away: CCPS
Decision Matrix:
|
If Your Answer Is... |
Choose... |
|
Seed stage + uncertain valuation + angel investor |
CCD |
|
Series A + agreed valuation + institutional VC |
CCPS |
|
Bridge round + larger round coming + existing investors |
CCD |
|
Series B+ + multiple investors + complex terms |
CCPS |
|
Need immediate capital + low documentation + flexible terms |
CCD |
|
Institutional requirements + liquidation preference + board seats |
CCPS |
How My Valuation Can Help ?
At My Valuation, led by Parth Shah, an IBBI Registered Valuer and Licensed CPA with specialized expertise in complex securities valuation, we provide:
Strategic Advisory on Instrument Selection
We analyze your funding stage, investor type, business model, and growth plans to recommend the optimal instrument structure.
Comprehensive Valuation Reports
We provide Cost Accountant certified valuation reports (FEMA/FDI compliance), detailed DCF models and bifurcation analysis, fair market value calculations, and audit-ready documentation.
Term Sheet Review and Negotiation Support
We identify unfavorable clauses including excessive liquidation preference multiples, onerous anti-dilution provisions, and problematic participation rights.
FDI Compliance and FCGPR Filing
For foreign investors, we handle pricing guideline compliance certification, FCGPR filing on RBI FIRMS portal, and valuation justification for foreign exchange authorities.
Complex Securities Expertise
Parth Shah and his team has extensive experience valuing hybrid instruments (CCDs, CCPS, convertible notes), participating preferred structures, two-step conversion mechanisms, and 409A valuations.
Conclusion: Making the Right Choice
The CCD vs CCPS decision is contextual, not binary. Both instruments serve strategic purposes at different stages:
Choose CCDs when you need:
- Flexible bridge financing with deferred valuation
- Simple documentation and faster closing
- Clean cap table for near-term ESOP grants
- Angel/HNI investor-friendly terms
Choose CCPS when you want:
- Institutional-grade investment terms
- Liquidation preference for investor protection
- Clear cap table visibility
- Long-term investor alignment with milestone-based conversion
Best strategy: Use CCDs for bridge rounds and early-stage financing, then transition to CCPS for institutional Series A and beyond.
Ready to structure your next funding round? Contact My Valuation for expert guidance on CCD vs CCPS selection, comprehensive valuation services, and regulatory compliance support. Our team, led by IBBI Registered Valuer Parth Shah, specializes in complex securities valuation and has helped hundreds of Indian startups raise capital efficiently.
Schedule a consultation today to discuss your funding strategy and get a customized recommendation on the right hybrid instrument for your startup's unique situation.
