CCPS — Compulsorily Convertible Preference Shares — is the standard instrument through which institutional investors and angels invest in unlisted Indian companies at the seed and Series A stage. CCPS is not equity in its final form; it is a preference share that must convert to equity shares within a defined period or upon a defined trigger. Until conversion, CCPS holders have preference over equity shareholders in liquidation and may have specific rights not available to ordinary equity holders. The reason most Indian startups issue CCPS rather than ordinary equity at the seed stage is that CCPS allows investor protection provisions — anti-dilution rights, liquidation preference, information rights — to be structured clearly within the Companies Act framework without creating a separate shareholder class.
Understanding why CCPS is the market standard — and when ordinary equity is used instead — is essential for any founder negotiating a first institutional investment.
Why CCPS is the standard instrument in India
Indian company law creates a specific challenge for early-stage equity investment: preference shares issued to investors can be structured with protective provisions that ordinary equity shares cannot easily accommodate. Anti-dilution protection, for example, is most cleanly implemented through the CCPS conversion ratio — if the company raises at a lower valuation in future, the CCPS converts to more shares, protecting the investor's percentage. Implementing equivalent protection through ordinary equity requires more complex shareholder agreement provisions.
CCPS also provides liquidation preference. If the company is sold or wound up, CCPS holders receive their invested capital back (often at a 1x non-participating preference) before ordinary equity shareholders receive anything. This gives investors downside protection that ordinary equity does not provide — and is a key reason family offices and early-stage VCs prefer CCPS.
From a tax perspective, CCPS is treated as a debt instrument until conversion for certain purposes, which can be relevant for investors with specific tax mandates. Post-conversion, the shares become ordinary equity and are taxed as equity.
The key CCPS terms founders must understand
Conversion trigger and timeline: CCPS must convert to equity by a defined date or event — typically the earliest of a qualified IPO, the next qualified financing round above a defined threshold, or a mandatory conversion date (often 10-20 years from issue). Understanding when your CCPS converts, and into how many shares, determines the founder's dilution.
Anti-dilution provisions: Most Indian CCPS includes weighted average broad-based anti-dilution protection. This means if you raise at a lower valuation in the future, the CCPS conversion ratio adjusts to give the investor more shares than originally anticipated. Full ratchet anti-dilution — where the investor is fully protected against any down round — is significantly more founder-unfriendly and should be resisted in negotiation.
Liquidation preference: Standard market terms in India are 1x non-participating liquidation preference. This means the investor gets their money back first in an exit, but does not share in additional upside beyond the conversion value. Participating preferred — where the investor gets their preference AND participates in the remaining proceeds — significantly reduces founder upside and should be scrutinised carefully.
Drag-along rights: Most CCPS term sheets include drag-along rights, allowing a majority of investors to compel minority shareholders (including founders) to sell in a transaction. The threshold at which drag-along can be exercised — typically 75% of the investor class — matters for how easily an investor can force a sale the founder does not want.
When ordinary equity is used instead of CCPS
Ordinary equity is used when the investor has no need for preference provisions — typically in two situations. First, very early-stage investments by friends, family, or personal angels who are investing on trust and relationship rather than on structural protection. Second, when a strategic investor is taking a stake specifically to avoid the preference mechanics that create complexity in a downstream transaction.
For any institutional investment — angel networks, family offices, seed funds, VCs — CCPS is the correct and expected instrument. A founder who proposes ordinary equity to an institutional investor will typically be asked to revert to CCPS.
Eone Capital advises consumer brand founders on term sheet negotiation and investment structure from seed through Series A.
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