पाठशाला Pathshala · धन Dhan, Money · Lesson 26 · Scale

Structured rounds: what a headline valuation can hide

A structured term sheet buys a higher number with terms that pay the investor first. Decode multiples, participation and ratchets, and compute the valuation you are really accepting.

Pathshala, The Founder Library · 11 October 2026 · 7 min read

The polished head of a metal wrench in close-up. — Photograph: Nic Wood · Pexels

A term sheet can raise the valuation by a third and lower what the founders will receive by more than that. The trick is not in the number on the front page. It is in four clauses on the back, and each of them can be priced before you sign.

This lesson explains what a structured round is, the four terms that do the structuring, a worked case from a public filing, a figure that turns any structure into an effective valuation, the Indian rule that changes the arithmetic at a listing, and a test to run on every late-stage term sheet.

What a structured round is

A clean round sells shares at a price and gives the investor the usual protections: a one-times non-participating preference on its [CCPS](/library/ccps-instrument-indian-vcs-actually-use) and broad-based weighted average anti-dilution. A structured round sells shares at a higher price and adds terms that pay the investor more than its share in the outcomes it fears. The investor is indifferent between the two; it has simply moved its protection from the price into the paper. The founders often are not indifferent, because the headline is what the press, the team and the next investor see.

Structure is rarer than founders fear and more common late. Carta counted preferences above one times in just 1.9 per cent of primary seed and Series A rounds in 2024 to the end of October and described them as mostly a late-stage phenomenon, more common in bridges than in new primary rounds. In its first-quarter review of that year high liquidation preferences appeared in eight per cent of new rounds, tied for the highest share of the decade, and a lawyer quoted there reported seeing more participating preferred, usually with a cap between 1.5 and 3 times. The pattern is consistent: structure appears when a company needs a price the market will not give it cleanly.

The four terms that do the structuring

A liquidation multiple above one. At a sale the investor takes back twice or three times its money before anyone else receives a rupee, unless converting into ordinary shares pays it more. A two-times preference on ₹100 crore means the first ₹200 crore of any sale belongs to that investor.

A limestone rock face in close-up with its layers laid one on another. — Each layer was laid down at a different time and carries the weight of everything above it. A preference stack works the same way. Photograph: Lucent Designs Media International · Pexels

Participation. A participating investor takes its preference and then also its percentage of whatever is left, so it is paid twice on the same shares. A cap limits the total, usually to a multiple of the investment, after which the investor is better off converting.

Ratchets. A full-ratchet anti-dilution clause resets the investor’s price to any lower price the company later accepts, whatever the size of that later round. An IPO ratchet promises the investor a minimum return at listing: if the IPO price is below the guaranteed level, the investor receives extra shares until its holding is worth that amount. Both are paid for in dilution by everyone else.

Guaranteed returns and redemption. Cumulative dividends, a put option or a redemption right after a fixed date turn equity into something closer to debt. The effect on founders is a claim that grows whether or not the company does.

A worked case: the ratchet in a public filing

The clearest example of a ratchet in a public document remains Square’s listing in 2015. TechCrunch’s reading of the S-1 shows that its Series E investors paid $15.46 a share, in a round reported at a $6 billion valuation, with a promise of extra shares if the IPO priced below $18.56, a twenty per cent return. The company then guided an IPO range of $11 to $13. At the $12 midpoint the article estimated about 5.3 million additional shares, worth $63.6 million, would go to those investors from everyone else. The headline was $6 billion. The structure meant the company was worth less than that from the day it was signed, and every other shareholder paid the difference at listing.

That is not an isolated finding. Will Gornall and Ilya Strebulaev valued 135 American unicorns with their terms included and reported that the post-money valuations averaged 50 per cent above fair value, with 65 of the 135 losing unicorn status once the terms were priced. A headline valuation is the price of the newest share multiplied by all the shares, as if every share carried the newest rights. Under structure, none of the older shares do.

Pricing the paper: the effective valuation

The way to price structure is to ask one question at several exits: at what valuation would plain equity have received the same money? Take ₹100 crore at a ₹1,000 crore headline. With a two-times non-participating preference, a sale at ₹500 crore pays the investor ₹200 crore, which plain equity would have earned only at a ₹250 crore post-money. At a ₹1,000 crore sale the effective post-money is ₹500 crore, half the headline. Only above ₹2,000 crore does the investor prefer to convert and the structure stops costing anything. With a one-times participating preference the effective post-money is ₹526 crore at a ₹1,000 crore sale and still only ₹769 crore at ₹3,000 crore: participation never fully goes away.

Move the exit slider to the three sale prices you actually believe in: the disappointing one, the plan and the dream. If the curve sits well below the headline at the first two, the clean offer you rejected may have been the better price. Switch to the IPO route and watch a twenty per cent ratchet take a sixth off the headline at a flat listing, and far more at a listing below it. Then compare the effective valuation at your plan exit with any clean term sheet on the table. That comparison, not the headline, is the decision.

A structured round does not sell the company for more. It sells the same company at the same price and writes the difference into the terms. Compute the effective valuation before you celebrate the headline.

The Indian twist: preferences end at the IPO

In India the preference has a natural end date. SEBI’s issue rules bar a company with outstanding convertible securities from an IPO, with exceptions that include employee options and fully paid-up convertibles that must convert on or before the filing of the red herring prospectus; Mondaq’s summary of the 2025 amendments sets out the exemption. A late-stage investor holding CCPS with a two-times preference therefore converts into ordinary shares before the listing, and its preference disappears. That is why investors who expect an Indian listing negotiate for the one term that survives conversion: a conversion ratio that adjusts to the IPO price, which is an IPO ratchet in Indian clothing.

Read the conversion formula in the articles with that in mind. A clause that adjusts the conversion ratio if the company lists below a stated valuation, or within a stated period, is a ratchet whatever it is called. Model it on the IPO route of the figure with the guaranteed return it implies. And remember that conversion terms are fixed in the articles before the listing process starts; [the term sheet lesson](/library/term-sheet-clause-by-clause) shows where they sit.

When a structured round is the right answer

Structure is sometimes the best of the available prices. A company that cannot raise at its last valuation, has strong reasons to avoid [a down round](/library/down-rounds-and-recaps-surviving-lower-number) such as customer contracts or employee options set at the old price, and expects a large exit, may rationally pay in terms rather than in price. The terms cost little if the large exit arrives. They are a bet on the dream outcome, paid for out of the disappointing ones.

If you take that bet, take it on the best version of the paper. Prefer a multiple over participation, because a non-participating multiple stops costing anything above the conversion point. Insist on a cap on any participation. Prefer a weighted average adjustment to a full ratchet, and an IPO ratchet with a sunset date and a ceiling on extra shares. Make the structure apply only to the new money, not to earlier classes, so the stack does not compound. And tell the next investor exactly what is in the paper, because it will find out in diligence and price it anyway.

Before you sign: the structure test

Run this on every term sheet after Series A, in one sitting with your lawyer and your finance lead. List every term that pays the investor anything beyond its percentage: multiple, participation, cap, anti-dilution type, IPO adjustment, dividends, redemption, put. Agree three exit values with the board, one sale and one IPO among them. Put the terms into the figure and write down the effective valuation at each. Ask for a clean term sheet at the price the effective valuation implies, and compare. If you accept the structure, record the effective valuations in the board minutes so that the next round is priced against the truth, and repeat the exercise each year at the annual plan.

Nothing here is legal, tax or investment advice. The SEBI issue rules were checked on 11 October 2026; have any structured term sheet modelled and reviewed by your lawyer before signing.