Shareholders Agreement Template for Convertible Debt

What really are Convertible Debentures?

A Compulsorily Convertible Debentures (CCD) funding round for startups involves issuing debentures to investors that will be compulsorily converted into equity shares of the startup at a predetermined future date or event, typically upon reaching certain milestones or upon a future financing round. Startups commonly use this funding mechanism to raise capital while deferring the company’s valuation until later.

Here’s what startups should keep in mind when considering a CCD funding round:

1. Understanding CCDs:

Startups should clearly understand what CCDs are and how they work. CCDs are debt instruments that are convertible into equity shares of the company at a future date or event. This allows startups to raise capital without immediately diluting existing shareholders.

2. Conversion Terms:

Startups need to carefully consider the conversion terms of the CCDs, including the conversion ratio, conversion price, and any adjustments to the conversion terms. These terms will determine the number of equity shares the CCD holder will receive upon conversion.

3. Impact on Ownership and Control:

Startups should assess the impact of the CCD funding round on their ownership and control. While CCDs may not immediately dilute existing shareholders, they will result in dilution upon conversion. Startups should consider whether the potential dilution is acceptable and how it will affect the company’s ownership and control structure.

4. Maturity Date:

Startups should be aware of the maturity date of the CCDs, which is the date upon which the debentures must be compulsorily converted into equity shares. Startups need to plan for this eventuality and ensure sufficient funds are available to fulfil their obligations to the CCD holders.

5. Legal and Regulatory Compliance:

Startups must comply with all legal and regulatory requirements related to CCD funding rounds. This may include obtaining approvals from regulatory authorities and drafting appropriate legal documentation, such as a CCD agreement and a termsheet.

6. Negotiation and Due Diligence:

Startups should conduct thorough negotiation and due diligence when structuring a CCD funding round. This includes negotiating favorable terms with investors and performing due diligence to assess the transaction’s financial and legal implications.

7. Alignment of Interests:

Startups should ensure that the terms of the CCD funding round align with their long-term goals and objectives. This includes considering the interests of existing shareholders, employees, and other stakeholders and ensuring that the terms of the CCDs are fair and reasonable.

8. Exit Strategy:

Startups should consider their exit strategy and how the CCD funding round fits into their overall growth and exit plans. While CCDs provide flexibility in valuation and timing, startups should have a clear plan for how they will eventually exit the investment and provide a return to investors.

Overall, CCD funding rounds can be an effective way for startups to raise capital and fuel their growth. Still, it’s important for startups to carefully consider the implications and ensure that they are well-prepared for the process. This includes understanding the terms of the CCDs, assessing the impact on ownership and control, complying with legal and regulatory requirements, and aligning the terms of the CCDs with their long-term goals and objectives.

Venture Debt Funds in India: