For Converting Debt Investment Into Equity, Startups Get Up To 10 Years
- ByStartupStory | March 21, 2022
The government, offering a major relief to budding entrepreneurs, has extended the timeline to up to 10 years for startups converting their debt investments into equity shares.
According to a press note of the Department for Promotion of Industry and Internal Trade (DPIIT), among the key notable modifications is for startups, it has reviewed the extent of FDI policy in India and announced various amendments.
The DPIIT note said that Convertible note means an instrument issued by a startup company acknowledging receipt of money initially as debt, within a period not exceeding ten years from the date of issue of the convertible note, upon the occurrence of specified events as per the other terms and conditions agreed to and indicated in the instrument, which is repayable at the option of the holder, or which is convertible into such number of equity shares of such startup company.
It means, through convertible notes an investor can invest in a startup, which is a kind of debt/loan instrument. But in this investment, the investor can ask the startup to issue equity shares of the company against the money that they had initially invested as a loan/debt, the investor is given the option that if the startup performs well or achieves some performance milestones in the future.
Usually opted by angel or seed investors who are looking to invest in an early-stage startup that has not been valued explicitly, convertible notes are generally debt instruments.
On March 11 this year, Blinkit (formerly Grofers), closed an additional $100 Mn financing as a part of its fundraising. Through convertible notes funds are being raised from Zomato, which will later be converted into equity.
Blinkit is looking to raise from Zomato and other investors, as a part of a larger $400-Mn funding, which is expected to close in the next two quarters.
In January this year, Udaan, a Bengaluru-based B2B ecommerce giant raised about $250 Mn in a fresh round of funding. Through convertible notes it has raised $200 Mn and through debt $50 Mn.
The participation in the B2B unicorn has been seen from 5 new investors in this round and two times its convertible note round was oversubscribed.
Convertible notes including Airbnb, Uber, Spotify, Robinhood among others have been used successfully by Large scale tech Companies. Last year Airbnb announced that it intends to float $2 Bn worth of convertible notes in order to help shore up its finances.
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