When investing in startups, private companies, or even pre-IPO opportunities, you’ll often hear terms like CCPS, CCD, and Equity Shares.

They may sound similar, but they are very different instruments — especially in terms of risk, returns, taxation, control, and exit options.

Let’s break them down in simple language.

1. What is CCPS?

CCPS (Compulsorily Convertible Preference Shares) are preference shares that must convert into equity shares after a fixed time or event (like IPO).

Before conversion:

• Priority in dividend
• Priority in liquidation
• Usually no voting rights

After conversion:

• Become regular equity shares

Think of it as:
🛡️ Protection first → 📈 Growth later

2. What is CCD?

CCD (Compulsorily Convertible Debentures) are debt instruments that must convert into equity after a specified period.

Before conversion:

• Fixed interest income
• Considered debt in books
• Higher safety compared to equity

After conversion:

• Become equity shares

Think of it as:
💰 Fixed return first → 📊 Equity exposure later

3. What are Equity Shares?

Equity shares represent ownership in the company.

• Full voting rights
• No fixed return
• Highest risk
• Highest long-term wealth creation potential

You directly participate in profits and losses.

Direct Comparison: CCPS vs CCD vs Equity

Feature	CCPS	CCD	Equity
Type	Preference Share	Debt Instrument	Ownership Share
Fixed Return	Dividend (if declared)	Fixed Interest	No
Conversion	Mandatory	Mandatory	Not applicable
Risk Level	Medium	Lower (initially)	High
Voting Rights	Limited	No (before conversion)	Full
Downside Protection	Yes	Yes	No
Used In	VC / PE deals	Structured funding	Public markets

Risk Comparison

🔹 Lowest Risk: CCD

Because:

• Fixed interest
• Debt priority
• Legal repayment structure

🔹 Medium Risk: CCPS

Because:

• Priority over equity
• But dividend not guaranteed

🔹 Highest Risk: Equity

Because:

• Returns depend entirely on performance
• No fixed income
• Last in liquidation priority

Return Potential Comparison

Instrument	Short-Term Return	Long-Term Return
CCD	Stable	Depends after conversion
CCPS	Moderate	High after conversion
Equity	Volatile	Potentially very high

If the company becomes very successful:

• Equity gives maximum return.
• CCPS also benefits after conversion.
• CCD gains depend on conversion ratio.

When is CCPS Better?

CCPS is ideal when:

• You want downside protection.
• You’re investing in early-stage startups.
• You want structured conversion terms.
• There is a clear IPO plan.

Most venture capital investments are structured through CCPS.

When is CCD Better?

CCD works well when:

• You want fixed income before conversion.
• You want lower risk exposure.
• The company is stable but not yet ready for equity valuation clarity.

Used commonly in structured private deals.

When is Equity Better?

Equity is better when:

• You strongly believe in company growth.
• You’re investing for long-term wealth creation.
• You are comfortable with volatility.
• It’s a listed company with transparency.

Retail IPO investors mostly buy equity shares.

Tax Angle (India – Broad View)

• CCD Interest → Taxed as income
• CCPS Dividend → Taxed in hands of investor
• Equity Gains → Capital gains tax (LTCG/STCG)

Tax treatment may vary based on holding period and structure.

Real-World Example

Let’s assume a startup:

• Raises money at ₹100 per instrument.
• After 4 years, IPO valuation implies ₹400 per share.

If:

• You held equity → 4x return.
• You held CCPS → Converts → 4x return.
• You held CCD → Earned interest + conversion upside.

But if business fails:

• CCD investors recover first.
• CCPS investors next.
• Equity investors last.

Advantages & Disadvantages

CCPS:-

Advantages

• Downside protection
• Conversion benefit
• Preferred liquidation rights

Disadvantages

• No guaranteed dividend
• Dilution risk
• Complex terms

CCD :-

Advantages

• Fixed interest
• Debt protection
• Structured return

Disadvantages

• Limited upside before conversion
• Conversion valuation risk

Equity :-

Advantages

• Unlimited upside
• Voting rights
• Simple structure

Disadvantages

• High volatility
• No income certainty
• Highest downside risk

So, Which is Better?

There’s no universal answer.

• Conservative investor → CCD
• Balanced investor → CCPS
• Aggressive growth investor → Equity

In startup investing, professionals often prefer CCPS because it balances protection and upside.

In listed markets, retail investors mainly invest in equity shares.

FAQs

1. Is CCPS safer than equity?

Yes, due to preference rights before conversion.

2. Is CCD risk-free?

No investment is risk-free, but CCD carries lower risk than equity.

3. Can retail investors buy CCPS?

Rarely. Mostly used in private placements.

4. Which instrument gives highest returns?

Equity — if company performs well.

5. Why do VCs prefer CCPS?

It protects downside while keeping equity upside.