A Series A lead offers Kavachik Security a higher pre-money valuation, but only with a bigger option pool, a 1.5x liquidation preference and a second board seat. What does each term cost the founders, and which would you trade?

The richer offer is worse for the founders at both exits: about Rs 14 crore worse at Rs 300 crore and Rs 48 crore worse at Rs 1,500 crore. The bigger pool is the expensive term; it more than cancels the Rs 20 crore of extra price. The 1.5x preference costs about Rs 4.5 crore, and only in the small exit. Take the higher price and the 1.5x, refuse the extra pool, and keep the board balanced.

Imagine selling your flat for a higher price, then learning the buyer wants you to pay for a new kitchen out of it. The number on the agreement went up; what you keep did not. An option pool created inside the pre-money is exactly that kitchen: it is carved out of the existing holders before the investor's money arrives, so the founders pay for all of it. The honest measure is the effective pre-moneyThe headline pre-money minus the value of the new option pool created inside it. It is the price the existing holders really receive for their shares.. Base offer: Rs 160 crore less a 10% pool on a Rs 200 crore post, which is Rs 140 crore. Richer offer: Rs 180 crore less 15% of Rs 220 crore, Rs 147 crore.

So Rs 20 crore of headline became Rs 7 crore of real price. But ownership moves the other way. The investor buys Rs 40 crore of a Rs 220 crore company, 18.2%, the pool takes 15%, and the founders are left with 66.8%, down from 70.0%. The founders sell at a slightly better price per share but end up owning less, because a bigger slice of the company has been set aside for people not yet hired.

Change one term at a time and price each step. Raising the pre-money to Rs 180 crore with the old pool lifts the founders from 70.0% to 71.8%: worth Rs 5.5 crore at a Rs 300 crore exit and Rs 27.3 crore at Rs 1,500 crore. Growing the pool to 15% takes 5 points away: Rs 15.0 crore and Rs 75.0 crore. The pool change is roughly three times the size of the price change at every exit, because ownership points are worth the same fraction of any sale price.

The preference is different in kind. At Rs 300 crore, the investor's 18.2% converted is worth Rs 54.5 crore, less than a 1.5x preference of Rs 60 crore, so it takes the Rs 60 crore instead, and the Rs 240 crore left is shared among common holders. Founders lose Rs 4.5 crore. At Rs 1,500 crore the converted stake is worth Rs 273 crore, the preference is never used, and it costs nothing. A liquidation preferenceThe amount an investor is paid back before common shareholders receive anything in a sale. Non-participating means the investor takes either that amount or its converted share, whichever is larger. only bites in the outcomes where the company sells for little.

Trade the pool first. Ask the lead to size the pool to a hiring plan: which roles over the next eighteen months, at what grant each. If the plan needs 10%, the extra 5% is a transfer from founders to the investor dressed as a hiring budget. Conceding the 1.5x preference in exchange for a 10% pool leaves the founders better off than the base offer at both exits, because the preference only costs money in a sale small enough that everyone has already done badly.

The board seat has no rupee cost, but it is the term to watch longest. Two investor seats on a five-person board means the investor needs one ally to carry a vote on hiring or firing the CEO, a sale, or the next financing. The usual fix is two founder seats, two investor seats and one independent both sides approve. Say the limitation too: if the pool is not fully used by exit, unallocated options are cancelled and the dilution is partly returned to everyone, so the pool cost above is an upper bound.