Compulsorily Convertible Preference Shares (CCPS)

The workhorse of Indian startup funding

Compulsorily Convertible Preference Shares (CCPS) are the instrument almost every venture-capital deal in India uses. They are a hybrid: legally preference shares to begin with, but ones that must convert into ordinary equity shares by a predetermined date or on a trigger event such as an IPO or the next funding round. The "compulsorily" is what matters, unlike optionally convertible instruments, conversion is not a choice.

Why this structure rather than plain equity? Because it lets VCs combine the protections of preference shares with eventual ownership of equity upside.

Why VCs love them

CCPS carry investor-friendly terms that plain equity does not. The most important is the liquidation preference: if the company is sold or wound up, CCPS holders get their money back (often 1x their investment) before ordinary equity holders, including founders, see anything. This downside protection is central to venture investing.

They also typically come with anti-dilution protection (adjusting the conversion ratio if a later round is at a lower valuation, the dreaded "down round"), and the conversion ratio itself can be tied to performance milestones. Crucially, they let investors take a meaningful economic stake without immediately diluting their voting equity stake the same way.

The Indian regulatory and tax angle

In India, CCPS are governed by the Companies Act and, for foreign investors, by FEMA rules, which historically required convertible instruments to convert into equity (rather than be redeemed) to count as FDI rather than debt, making CCPS the compliant choice for foreign VCs. Pricing and valuation must follow FEMA norms.

For founders, the trade-off is real: CCPS give investors strong protections that can disadvantage common shareholders, especially in a disappointing exit where liquidation preferences eat into proceeds. Understanding the conversion ratio, liquidation preference and anti-dilution clauses in a CCPS term sheet is essential, because these terms quietly determine who actually makes money when the company is eventually sold.