Preference shares

Preference shares are a class of share capital that ranks above ordinary (equity) shares in two key situations: the distribution of dividends and the distribution of assets upon winding up or sale of the company. This seniority makes them attractive to investors who want exposure to a startup's upside while limiting downside risk relative to founders and common shareholders.

Under the Companies Act, 2013, preference shares issued by Indian companies must be redeemable (within 20 years) or compulsorily convertible. The most common variant in the venture ecosystem is Compulsorily Convertible Preference Shares (CCPS), which must convert into ordinary equity shares on a fixed date or event. Optionally convertible or redeemable preference shares can be classified as debt under FEMA if they carry a guaranteed return, restricting foreign investment eligibility.

Preference shareholders typically enjoy several contractual protections layered on top of the basic preference in dividends and liquidation: anti-dilution provisions that adjust conversion ratios if the company raises future capital at a lower valuation; information rights giving access to financial statements; board representation; and veto rights over major decisions such as further share issuances, asset sales, or changes to the company's charter.

The liquidation preference — often 1× non-participating in standard Indian VC deals — means preference shareholders recover their invested capital before any proceeds flow to ordinary shareholders in a downside exit. In participating structures, they also share in any remaining proceeds proportionally, which is more dilutive to founders. Understanding the exact preference stack on a cap table is critical when modelling exit outcomes.