INVESTING

IN
MYNT

STARTUPS
What beginners need to know
 What is a CSOP?
Community Stock Option Pool
CSOP is a new financial instrument in the markets,
which would make investing easier and more
compliant.
Like ESOPs (Employee's Stocks Option Pool), CSOPs
provide equity as compensation or reward to the
community around a start-up like suppliers,
investors, customers, etc.
So this way they make them owners or
stakeholders in their businesses.
They don't get voting rights or place in the cap
table. Mostly start-ups use this instrument to create a
strong and promising community on which they can
bank upon. They are being provided equity in the
company for their relationship with the company.
This reduces customer churn rate and customer
acquisition costs (CAC).
 Benefits to Investors
Financial benefit-The investors or the
community gets financial benefits, as they are
getting a stake in the company.
Money Grows at a higher pace-They can be
investors in the start-up at an early stage and
when the start-up grows the investors get an
additional benefit.
Low entry and exit costs- as there are fewer
registration charges and the transfer of shares
is easy.
Benefits to Start-ups
Tax Advantage- Tax relief is given as a
deduction from company profits of an amount
equivalent to the benefit received by the
option holder.
Strong Community-It helps the start-ups
make a strong community as they would like
to remain connected with the business.
Growth of the business- as the community is
benefited from the business profits so they
thrive to help company grow.

Losing Money- As mentioned by some experts startups have the highest

risk-reward ratio so as the potential returns are high so is the risk.
Risks Less Liquidity- as the shares can be sold only when an event occurs like
Involved IPO, Secondary sale, etc.
No regulation- till now there is no regulations in India regarding online
fundraising, so there is no law or act governing it.
CCPS
COMPULSORY CONVERTIBLE PREFERNCE SHARES
Compulsory convertible preference share
They offer fixed income to investors
They get converted into equity shares after a
predetermined period of time.
They reap the benefits of preference shares like preference
in dividend distribution etc. till the time they get converted
into equity shares
Risks Involved
Targets and Timelines- If the company fails to achieve
the set targets, the investor can increase his stake in the
company.
Setting up a fair conversion ratio and fair targets
,
Benefits to Investors
They get preference when dividends are distributed: in a
scenario where the company doesn't have enough profits for
equity and preference shareholders, the company will pay ccps
holders.
Helps investors participate in the growth of a company as they
move from lower to higher valuation
A ccps holder, if he comes early, has more rights than a
shareholder coming later when the company has a higher
valuation .
Benefits to Start-ups
Maintaining Control- the company can raise funds without
distributing the control of management, and the company will
still have its management control with no interference.
Fill the valuation gap- typically a firm would require certain
valuations to raise funds, but since it is difficult to determine in
the case of startups, and people can have a difference of
opinion, ccps can become a good choice to invest in.
They keep their equity stake intact when the company issues
equity shares to new investors,
 COMPULSORY CONVERTIBLE DEBENTURES
(CCD)
CCD is the financial instrument issued by companies as a debenture (a medium- to long-term debt security
issued by a company as a means of borrowing money at a fixed interest rate), which would be converted
into equity on maturity.
Since the initial stages of a start-up are not stable, there is usually a lack of assets and cash flow among
the entrepreneurs. This makes it difficult to arrive at an accurate valuation of the company, which is an
essential prerequisite for investors who pool in their resources. This is when the investors opt for such
securities.

Benefits to Investors
If the stock price of the issuer declines, investors have an option to
hold onto their bonds till maturity.
An investor will be paid a fixed interest rate and will also have an
option to take part in a stock price increase i.e. to convert the loan
to equity when the stock prices are rising.
CCD are hybrid investment instruments and not equity capital, they
do not interfere in the management of the company.
Even if the start-up fails, they are bound to receive interest.
Benefits to Startups
It allows the raising of funds in the quickest and most feasible way possible.
Debenture holders have no voting rights.
It also possesses better pricing on equity, and is based on the company’s value
in the future.
A CCD is far more preferable as has less expensive service costs. This is because
dividends are not taxable.
It can raise funds through CCD even before the accurate valuation of the
Startup.
It is very much economical for the start-ups as the low-interest rate gives them
an advantage in maintaining their finances without having to give away a lot of
equity immediately.

Dilution of Equity: The end result would be a large number of shareholders. Hence,
the profit will be divided between a larger pool of investors and each individual
Risks investor would earn a smaller earning per share.
Lower Priority: If the issuer enter bankruptcy, convertible bondholders will be paid
Involved back after most other classes of debt, including corporates. The claim of CCD
holders will be subordinate to the claims of most debtholders.
Riskier: There is a possibility that the stock price of a company may reduce after
conversion. In this case, investors may lose all of their invested money.
 Non-Convertible Debentures (NCD)
Debentures are Long - term debt instruments issued by a company for a fixed duration and promises to
regular interest to the investors. The NCD or non-convertible debentures are those debentures which cannot
be converted into equity.
Noteworthy features of NCDs are:

Digitalized: Direct interest in Capital gains:

Easily tradable:
The NCDs are bank: Since NCDs are listed
The NCDs are
issued and traded The NCDs interest securities, it can also
listed in the open
in the demat form amount is directly benefit from fluctuations
markets and can
only. credited to the bank in market and give capital
be easily tradable
account of the holder. gains to the investors

RISKS ASSOCIATED:
1. Capital Losses - Since it is a listed security, its value can also fall below face value due to market sentiment.
2. Interest Rate Risk - If the debenture gives fixed rate of return, then in times of rising market rates investors
might find themselves losing out on interest income.
 CSOP
1. Issue- It is issued by new-age startups as a contract between the startup and its community, giving them Stock
Appreciation Rights (SARs) which entitles the investor to receive value equivalent to appreciation in the fair
market value of equity shares of a company, here the startup returns the money to the investors at a future
event. By this, the investors get a financial stake but they do not become the holders of equity.
2. Transfer- They are highly liquid as SARs can be settled in cash, and can be easily transferred to third party
without the applicability of stamp duty as opposed to other instruments.
LIFECYCLE

3. Exit- The CSOPs agreements are very well engineered to ensure exits are fair for both parties, the exits can be
voluntary as well as involuntary. Briefly elaborate on what you want
to discuss.
A voluntary exit is a buyback or secondary sale, the company can exercise a mandatory call option
and can buyback the CSOPs (redemption of SARs) at the fair market value of the company
Involuntarily exits are when the company agrees to buy back SARs due to factors such as delusion mergers, IPOs
or even with transfer of the subscription by the subscriber.

CCPS
1. Issue- It is issued during the funding stage of any growing startup. The investors get preference shares which offers
fixed income to investors as dividends and these CCPS are compulsorily converted into equity shares after a
predetermined period or on conditions.
2. Conversion - CCPS are converted into equity shares at a predetermined ratio after the fulfillment of the conditions.
no stamp duty is required to be paid on the conversion in Equity Share Certificate as it will not change its Category.
Generally These shares get converted to ordinary equity shares after 10-15 years which is a good time for startups
to give their investors good return.
3. Exit - In case the company cannot deliver on the promised growth on maturity, the investors can increase their stake
upon the conditions set for the same amount invested. However, the option to convert these securities into stock
gives the investor the opportunity to gain from a rise in the share price. These can be easily converted into liquid
form as of equity shares.
 LIFECYCLE
CCDThe following needs to be decided while raising a convertible debenture-
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.
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.
Maturity date: This sets a date at which the safe will automatically convert to equity unless certain conditions are met.
Valuation Certificate- The ventures are now required to obtain a ‘Valuation Certificate’ from the appropriate certifying officer at the time of investment.
In a CCD round where the investor is a VC fund, an important reason why CCD is preferred over convertible notes is the fact that CCDs can be converted into CCPS
while convertible notes need to be converted into equity shares.
CCD rounds are also witnessed in smaller fund raises in very early stage companies where the investor(s) and founders want to defer valuation discussions.
Typically the reason is that all participating investors might not be investing at least Rs. 25 lakhs.

NCD
It is to be noted that the debentures whether secured or not, shall be listed on the recognised stock exchange.
Issuance-Companies provide non-convertible debentures through open market public issues, which the interested investors can buy with a specified period.
Tradable Securities-Non-Convertible Debentures are traded in the stock market.
Credit RatingNon-convertible debentures are not backed by any collateral, thus only companies with good credit rating can issue debentures. Even the NCD
debentures are regularly rated by the credit rating agencies.
Interest- The interest rates are mostly fixed. The interest rate has an inverse relationship with the creditworthiness of the company. A high credit rated
nonconvertible debenture will have lesser interest rates.
Return Rates- Every non-convertible debenture can earn returns in two ways – growth based and interest-based or cumulative opportunities. Secured NCDs may
offer higher interest rates than unsecured NCDs. This is because the secured non-convertible debentures are secured by the company’s assets. They are
considered to be relatively less risky.
 LEGALITIES OF THESE INSTRUMENTS
COMPULSORY CONVERTIBLE DEBENTURES:
It is essential that convertible debentures have their prices decided/determined before issuance.
Non-fully convertible instruments fall under the ECB regime because they are considered external commercial borrowings ("ECB").
Fresh debentures issued under the Foreign Direct Investment Scheme shall be priced not less than the fair value of the shares
determined by a SEBI-registered Merchant Banker or a Chartered Accountant on an arm's length basis as per any internationally
accepted pricing methodology.
Any interest paid on CCD issued to the associated enterprise will be subject to the transfer regulation of India and should not be more
than the acceptable interest rate benchmark.

NON-CONVERTIBLE DEBENTURES:
The Credit Rating Information Services of India Ltd. (CRISIL), the Investment Information and Credit Rating Agency of India Ltd. (ICRA),
the Credit Analysis and Research Ltd. (CARE), the FITCH Ratings India Pvt. Ltd., or any other credit rating agency registered with the
Securities and Exchange Board of India (SEBI), must provide credit ratings for the issuance of NCDs to eligible corporations.
NCDs may be issued in multiples of Rs. 1 lac and denominations having a minimum face value of Rs. 5 lac.
The total amount of NCDs issued by a corporation must fall within either a limit set by the corporation's board of directors or the
amount specified by the credit rating agency for the assigned rating, whichever is lower. Within two weeks of the date the company
opens the issue for subscription, the total amount of NCDs scheduled to be issued must be issued.
Each time NCDs are issued, every corporate issuer must appoint a Debenture Trustee (DT).
They (CRAs) must abide by the SEBI's Code of Conduct when rating NCDs, the same as they must when rating other capital market
instruments. Depending on how strong it believes the issuer to be, the CRA may choose the length of the rating's validity period. As a
result, the CRA is required to provide a clear mention of the date of the rating's review at the time of rating.
COMPULSORY CONVERTIBLE PREFERENCE SHARES:
A firm may issue redeemable preference shares with a maximum 20-year term, excluding those for infrastructure projects, subject to
the preference shareholders' option to redeem a set percentage of shares annually.
Articles of Association of the Company (Section 55(2)) must give the go-ahead for the issuing of preference shares, and a special
resolution adopted at the company's annual general meeting must approve the issue of preference shares on a preferential basis.
At the time of allocation, convertible preference shares offered on a preferential basis must be fully paid up. Convertible Preference
shares cannot be issued by the company on a preferential basis v. The value of such a preferential offer shall be with an investment size
of at least Rs. 20,000 of the Securities' face value per Person.
All payments for the subscription of securities under this section must be made via check, demand draught, or another banking
channel; cash payments are not permitted

CONSUMER STOCK OPTION PLAN:

The exercise price of the options must be disclosed at the time of grant and cannot be obviously less than the market value ( ignoring
any restrictions) of shares of the same class at that time, according to CSOP legislation.
The CSOP options must be exercised before the third anniversary of the date of the grant, on or after the third anniversary of the date
of the grant, or in accordance with the terms of the CSOP, prior to the third anniversary of the date of the grant, while the scheme is
still a "Schedule 4 CSOP Scheme," and on or before the tenth anniversary of the date of grant.
CSOPs are no longer required to receive prior HMRC authorization as of April 2014. Instead, organizations will need to notify HMRC of
the plan and certify that it complies with ITEPA 2003 standards.
If a CSOP receives late notice, it will only be eligible for favorable tax treatment beginning with the tax year after the notification is
given, or, if the notice is received after July 6, the tax year in which it is received.
 INVESTOR STARTUP

CCD
Investor receives a fixed rate of interest and Startups can raise funds way before the
has an option to hold on to it even if the price company is correctly valued and it gives
declines or the startup fails. better price on equity along with tax benefits.

NCD
Startups use NCDs due to their nonrestrictive
Investors get interest and can also make
nature and to retain the control of the
profits due to makret fluctuations
management of the company.

CSOP
CSOP has very low entry and exit costs and it Startups use CSOPs to avail tax benefits. With the
provides more than just financial benefits as it benefit of high returns, CSOPs also help build a
provides a stake in the company. strong community of investors and businesses.

CCPS
Investors receive preference when dividends are
Quality stake is maintained while retaining
distributed and an early investor gets more rights
the control of the management and all
than a late investor. they also directly participate in
the growth of the company. valuation gaps are filled