I am currently raising funds for my startup, and here are the details I am learning regarding CCD for my startup.
A company can issue debentures as a way to raise capital. Debentures are debt instruments that are issued by a company and backed by its creditworthiness and reputation, rather than by specific collateral. They are typically used by companies to raise long-term finance and can be issued in various forms, such as secured debentures, unsecured debentures, and convertible debentures.
Here are some details that a startup in India should know about debentures:
- Eligibility: In India, only public limited companies can issue debentures to the public. Private limited companies and unlisted public limited companies can issue debentures to a select group of individuals or institutions, but not to the general public.
- Types of debentures: There are several types of debentures that a company can issue, including secured debentures, which are backed by collateral; unsecured debentures, which are not backed by collateral; and convertible debentures, which can be converted into equity shares at a later date.
- Interest rates: Debentures usually carry a fixed rate of interest, which is paid to the debenture holders on a regular basis (e.g. annually or semi-annually). The interest rate is usually higher for unsecured debentures compared to secured debentures, as the latter are backed by collateral.
- Redemption: Debentures have a fixed tenure and are usually redeemed by the company after the expiry of the tenure. In some cases, debentures may be redeemable before the end of the tenure, depending on the terms of the issue.
- Taxation: In India, the interest paid on debentures is taxable in the hands of the debenture holders. The company issuing the debentures is also required to pay tax on the interest earned.
The following needs to be decided while raising a convertible debenture, sharing this as we had to decide all of the below
- Valuation cap: This sets a maximum valuation at which the safe will convert to equity. This protects the investor by ensuring that they receive a certain percentage of the company, regardless of the company’s future valuation.
- Conversion discount: This is a discount on the price per share that the investor will receive when the safe converts to equity. For example, if the discount is 20%, and the valuation cap is $5 million, the investor will receive shares at a price of $4 million (20% discount on the $5 million valuation cap).
- Participation rights: This determines whether the investor has the right to participate in future equity rounds, and if so, on what terms. This can help protect the investor’s ownership percentage in the company.
- Preference: This determines the order in which investors will receive their returns in the event of an acquisition or IPO. For example, if an investor has “1x preference,” they will receive their investment back before any other investors receive any returns.
- Maturity date: This sets a date at which the safe will automatically convert to equity unless certain conditions are met (e.g., the company goes public or is acquired).
Also, we have made a term sheet with our lawyer. The following details are required for a term sheet
- Investment amount: The total amount of money being invested in the company.
- Valuation: The valuation of the company at the time of the investment.
- Ownership percentage: The percentage of the company’s equity that the investor will own after the investment.
- Board seats: The number of board seats (if any) that the investor will hold after the investment.
- Voting rights: The investor’s right to vote on key decisions affecting the company.
- Protective provisions: Clauses that protect the investor’s interests, such as rights of first refusal, information rights, and drag-along rights.
- Liquidation preference: The order in which investors will receive their returns in the event of an acquisition or IPO.
- Redemption rights: The investor’s right to require the company to repurchase their shares at a certain price.
- Warrants: The right to purchase additional shares at a later date at a pre-determined price.
The following will be the things that you will need to ask your lawyer to help you with
- Conduct limited secretarial and legal due diligence and issuance of reports.
- Drafting of the SAFE / convertible note agreement for the transaction.
- Drafting of all corporate actions required under the Companies Act, 2013 for the transaction.
- Filing of all required forms with the Registrar of Companies.
- Other incidental work thereto.
Hope the above set of information was helpful to you. If you need any further information, please write to me to know more