When the founder’s valuation expectations and the investor’s offer don’t align, you don’t have to walk away. You can use deal structures that defer the valuation call or share future upside based on performance- so neither side loses face.

The Core Problem

• Founder’s view: “My startup is worth ₹20 crore.”
• Investor’s view: “I’ll invest only at ₹10 crore.”
  
  

Instead of stalemating, design hybrid terms that connect price to proof:

1) Convertible Instruments (Defer the Valuation Decision)

Instruments: Convertible Note / SAFE / CCD / CCPS
Structure: Investor puts in money today as debt or preference shares that convert into equity at the next priced round.
Underlying principle: Price later, fund now. You avoid a premature pricing fight by using future market discovery.

Example: “We’ll invest ₹2 crore now, converting at the next round at a 20% discount to that round’s price, or at a valuation cap of ₹15 crore- whichever is better for the investor.”
Best for: Early-stage deals or when comparables are unclear.

2) Earn-Out / Performance-Linked Valuation

Structure: Lower base valuation today, with a contractual “top-up” if milestones are hit (revenue, EBITDA, users).
Underlying principle: Prove it and get paid. Founders unlock higher effective valuation once they deliver results.

Example: Base valuation ₹10 crore now. If monthly revenue hits the agreed target within 18 months, founders receive extra equity or cash to reflect a ₹15 crore effective valuation.
Best for: When the founder is confident, but the investor wants proof through traction.

3) Ratchet Mechanism (Valuation Adjustment Clause)

Structure: After the round, ownership shifts if performance diverges from plan. Beat targets and the founder’s stake ratchets up; miss targets and the investor’s stake ratchets up.
Underlying principle: Align price with outcomes, not forecasts.

Example: Founders 70%, investor 30% at close.

• If revenue < plan, investor increases to 35%.
• If revenue > plan, investor drops to 25%.

Best for: Growth-stage or buyout-style deals with clear KPIs.

4) Warrants or Options

Structure: Investor invests at the lower valuation today but receives warrants to buy additional shares later at a preset price if milestones are met.
Underlying principle: Contingent upside. Extra equity only triggers when the business proves worth.

Example: Investor invests at a ₹10 crore valuation and gets warrants exercisable at the same price if the startup crosses ₹5 crore ARR.
Best for: Moderate valuation gaps with well-defined milestones.

5) Tranching the Investment

Structure: A committed amount is released in milestone-based tranches, each tranche possibly at a higher valuation.
Underlying principle: Pay as you validate. Price steps up with reduced risk.

Example:

• ₹4 crore at ₹10 crore valuation now
• ₹3 crore at ₹15 crore valuation after 1 lakh users
• ₹3 crore at ₹20 crore valuation after profitability

Best for: When the main concern is scaling risk or market validation.

6) Hybrid Equity + Royalty / Revenue Share

Structure: Investor comes in at a conservative valuation and receives a small royalty on revenue (e.g., 2–5%) until a pre-agreed return multiple is met.
Underlying principle: Return-first protection. Investor de-risks with cash yields while founders retain upside after the cap.

Example: Investor pays ₹1 crore at a ₹10 crore valuation plus 2% of gross revenue until 2x is returned.
Best for: Cash-generating or D2C businesses with steady revenues.

7) Preference Shares with Liquidation Preferences

Structure: Investor moves closer to the founder’s desired valuation in exchange for superior downside protection (1x–2x liquidation preference).
Underlying principle: Higher headline price, stronger backstop.

Example: “Value at ₹20 crore, but if the company exits below ₹40 crore, we receive 2x our investment before common shareholders.”
Best for: When the gap is about perceived risk rather than fundamentals.

8) Revenue Milestone Buy-Back or Step-Up Equity

Structure: Contractual two-way adjustment. If targets are missed, founders buy back a portion of investor shares at a premium; if targets are exceeded, investor equity steps up.
Underlying principle: Self-correcting stakes. Equity rebalances to the side that was “right” about performance.

Example: If revenue misses target, founders buy back 5% at a pre-agreed premium. If revenue exceeds plan, investor’s stake increases by 5%.
Best for: Mid-stage deals with predictable metrics.

9) Phantom Equity / Bonus Pool for Founders

Structure: If the investor insists on a lower current valuation, founders negotiate a cash-settled bonus or phantom equity tied to future exit value.
Underlying principle: Preserve founder upside without altering cap table today.

Example: “Accept the lower valuation now, but if exit exceeds ₹100 crore, founders receive an additional 10% payout.”
Best for: When investors want governance/control comfort while founders protect long-run economics.

10) Dual-Tranche Valuation

Structure: Agree on two valuations- one lower “base” now and a higher “true-up” later if milestones are hit.
Underlying principle: Deferred repricing. Today’s cheque lands at investor comfort; a later adjustment recognizes delivered performance.

Example: Investor invests ₹2 crore at a ₹10 crore base valuation. If targets are met, a second tranche or adjustment retroactively prices the round at ₹15 crore.
Best for: Negotiations stuck on perception rather than risk appetite.

To Conclude

These structures help both sides meet in the middle. Founders keep aspirational valuations when they deliver results; investors get real protection if things go sideways.

Founder Tip

1. Don’t fixate on today’s price- optimize for flexibility.
2. Embrace conditional upside (earn-outs, ratchets, warrants).
3. Protect governance and future rounds (be careful with complex anti-dilution and stacked preferences).
4. Work with a venture-savvy lawyer who understands how these terms play together over multiple rounds.