Some structures designed to protect mission are a hybrid that are not easily classified as debt or equity, or could be classified as either equity or debt. The specific rules about classification depend on each jurisdiction’s tax laws.
In the US, you have a proposed innovation called Fly Paper. The creators of this structure designed it to be flexible, but in its default version its economic structure intended it to provide debt like returns and have a clear duration. The structure adds a condition to protect mission that is designed to prevent the issuer from selling the company to investors who are not mission aligned. If the issuer sells the company to investors that are not mission aligned, the security converts to equity at terms that are unfavorable to the issuer – thereby transferring some of the profits from the issuer to the security holder. ITP previously posted a blog on this security that you can read here.
An extensive review of the legal and tax considerations can be viewed here. The write-up offers details about the classification and tax accounting of the security and is a good review. However, it is important to note that the security has not been tested in courts or been subject to an IRS letter ruling or similar decision, which, in the US, is a risk mitigating step.
For issuers and investors outside the US where the tax considerations are either more flexible or clearer, this security is an interesting example of a penalty-based structure that can be used to protect mission.