Sarthavik Mobility has two Series B term sheets: a lower price with clean terms, or a higher price with a participating preference and a full ratchet. Compare the founders' proceeds at three exits and after a later down round.

Fund X's lower price pays the founders more at every exit below about Rs 975 crore. At Rs 150 crore founders get Rs 100 crore under X and Rs 54 crore under Y; at Rs 400 crore, Rs 267 crore against Rs 235 crore; at Rs 1,000 crore the two are within Rs 1.4 crore. After a later round at half price, Y's full ratchet doubles its shares, and at a Rs 400 crore exit founders would get about Rs 183 crore under X against Rs 146 crore under Y.

Imagine two people offering to fund your shop. One wants a third of the profits, or his money back if you close. The other wants slightly less than a third, but also one and a half times his money back first in any sale, before sharing the rest. Fund X buys a third of Sarthavik, 50 over 150, and takes either Rs 50 crore or its third, whichever is larger; Fund Y buys 27.8%, 50 over 180, but takes Rs 75 crore first and then its 27.8% of what is left. That second structure, a participating preferenceA liquidation preference after which the investor also shares in the remaining proceeds as if it had converted, so it is paid twice on the same shares., is why the higher headline can pay founders less.

Under Fund X, at Rs 150 crore the fund is indifferent between Rs 50 crore and its third, so founders get Rs 100 crore; above that it converts and founders keep two thirds. Under Fund Y, founders always get 72.2% of the exit less Rs 75 crore: Rs 54.2 crore at 150, Rs 234.7 crore at 400 and Rs 668.1 crore at 1,000. The two lines meet where two thirds of the exit equals 72.2% of the exit less Rs 75 crore, at about Rs 975 crore. Below that, the founders give up more to participation than they gain from the higher price.

Suppose Sarthavik later raises Rs 30 crore at half the Series B price. Under X, the round is at Rs 50 a share and weighted average moves Fund X's conversion price from Rs 100 to about Rs 85.71, so its 50 lakh shares become 58.3 lakh. Under Y, the round is at Rs 65 and the full ratchet resets Fund Y's price all the way down, doubling its shares from 38.5 lakh to 76.9 lakh. Founders end at 45.8% under X and 44.8% under Y. At a later Rs 400 crore exit where everyone converts under X, founders get about Rs 183 crore; under Y, Fund Y still takes its Rs 75 crore first, leaving founders about Rs 146 crore.

Fund X's, unless they are confident of an exit well above Rs 1,000 crore with no down round on the way. Fund Y's 30% higher headline is paid for with participation, which costs the founders money at every realistic exit, and a ratchet, which costs them most exactly when things go badly. A founder who takes Y is betting on the best case to win a vanity number. If they prefer Y's investor for other reasons, the trade to ask for is clean terms at a price in between, or participation capped at a total return of, say, 2x, after which Fund Y must choose between its preference and converting. The limitation: this ignores who the two funds are, and the better partner can be worth more than these differences.