Angel tax effect: Equity stakes yielding ground to other funding avenues

Convertible debentures & preference shares have emerged as options of choice for new ventures because, apart from deferring valuations, they allow founders to retain a hold over their companies

As angel tax demands and the fear of ceding control to investors roil the start-up ecosystem in India, financial instruments such as Compulsorily Convertible Preference Shares (CCPS) and Compulsorily Convertible Debentures (CCDs) are increasingly becoming the options of choice for fund raising.

These financial instruments not only help start-ups to avoid the incidence of tax by deferring valuation, but also allow the founders to retain greater control over their companies.

"Fund raising through CCPS and CCDs has always been there but after the imposition of angel tax, these instruments have seen wider acceptance, as they help in deferring valuation to