When raising bridge rounds or early-stage capital, cash-strapped startups face a dilemma: how to attract investors without the burden of regular interest payments that drain precious runway. Zero-coupon Compulsory Convertible Debentures (CCDs) solve this problem by eliminating periodic cash outflows while still providing investors with attractive returns through conversion discounts.
Quick Answer: A Zero-Coupon CCD is a compulsory convertible debenture issued with minimal or zero interest (typically 0.001% nominal rate) that converts to equity at a predetermined discount (15-25%) to the next funding round. Instead of paying periodic interest, start-ups compensate investors with higher equity conversion ratios, preserving cash flow while deferring dilution until the conversion event.
This instrument has become increasingly popular among Indian startups in 2024-2025, particularly for bridge rounds, angel investments, and pre-Series A financing where cash conservation is critical and valuation is uncertain.
Understanding Zero-Coupon CCDs: How They Work
The Basic Structure
Unlike traditional CCDs that carry interest rates of 8-15% requiring periodic payments, zero-coupon CCDs are structured with:
Nominal Interest Rate
Technically, most zero-coupon CCDs aren't completely interest-free. They carry a token interest rate of 0.001% to 0.01% annually to satisfy legal requirements under Section 71 of the Companies Act, 2013, which requires debentures to have some interest component. This minimal rate translates to negligible cash outflow for a ₹1 crore zero-coupon CCD at 0.001%, annual interest is just ₹1,000.
Conversion Premium Instead of Interest
The investor's return comes entirely from the equity upside at conversion. A typical zero-coupon CCD might offer:
- 20-25% discount to the next qualified round's share price, OR
- Valuation cap (e.g., ₹50 crore cap when next round values company at ₹100 crore)
- Whichever gives the investor more shares
How Conversion Works
Example Scenario: An angel investor subscribes to ₹50 lakhs of zero-coupon CCDs in January 2026 with:
- Interest: 0.001% per annum (₹500 annually)
- Conversion discount: 20% to Series A price
- Valuation cap: ₹40 crore pre-money
When Series A Closes in November 2026:
- Series A values company at ₹80 crore (₹100 per share)
- Zero-coupon CCD investor converts at ₹80 per share (20% discount)
- They receive 62,500 equity shares vs. 50,000 shares Series A investors get for the same ₹50 lakhs
- Effective return: 25% more shares for their 10-month early commitment
When to Choose Zero-Coupon CCDs
Ideal Use Cases
- Bridge Rounds Between Series (₹50 lakhs - ₹3 crores) When you need 6-12 months runway extension before closing a larger institutional round.
- Pre-Revenue Startups with No Cash Flow SaaS, consumer tech, or deep-tech startups burning cash on product development without revenue to service interest.
- Existing Investor Follow-On Participation Current angels or VCs bridging you to the next round without negotiating new terms zero-coupon structure is fastest path.
- Uncertain Valuation Scenarios When you're between ₹50-100 crore valuation estimates and don't want to lock in a specific number until customer traction validates growth.
When to Avoid Zero-Coupon CCDs
Avoid if:
- You're raising from institutional VCs who require current returns or participating preferred terms
- Your next funding round is 18+ months away (too long for zero-return investors)
- You have predictable cash flows and can comfortably service 8-12% interest
- You're concerned about excessive dilution and prefer paying interest to preserve equity
Valuation Certificate Requirement
Under the Provisions of Companies act, 2013:
- Startups must obtain valuation report from IBBI Registered valuer for CCD issuance.
- This applies to zero-coupon CCDs despite minimal interest
- Valuation justifies the conversion discount (15-25%) as reasonable market terms
About the Author
Parth Shah is the Founder and Team Leader of MyValuation, an IBBI Registered Valuer for Securities or Financial Assets under Section 247 of the Companies Act, 2013. He is a Licensed Certified Public Accountant (CPA) in the U.S., Fellow Chartered Accountant (FCA), and specializes in startup valuations, hybrid instruments (CCDs, CCPS, convertible notes), and regulatory compliance for fundraising transactions.
With extensive experience in valuing zero-coupon and structured convertible instruments across 300+ startup transactions, Parth provides strategic advisory on optimal instrument selection, fair market value certification for FEMA compliance, and Ind AS 109 accounting treatment guidance.
