- Debt security with nominal interest(or even zero interest)
- Call option-to convert the debt to equity at the IPO price/other reference price. This may even be adjusted with the performance of the company.
- Put option-promoters/company to buyback the debt at a fixed IRR
Of course, the company could argue that investors should consider a proforma picture ignoring this adjustment, analogous to ignoring 'credit value adjustments' on own debt. But if this loss leads to an enhanced call option for investors/exercise of put option due to triggering earnings based covenants, then the company has a problem. This calls for top notch investor relations and legal experts to help cover all such bases during financing. But despite that, such transactions would need to be structured much more carefully because more the protective covenants, likelier is it that more embedded options exist.