The option pool shuffle
Why a 10% pool sized post-money but created pre-money turns a $8,000,000 pre-money into $7,000,000.
The Seed term sheet says $8,000,000 pre-money and a pool of 10% post-money. Northwind's unissued pool is 935,000; to reach 10% of the post-round shares it needs 284,812 more, and the term sheet puts them in the pre-money. That is the option pool shuffle: the new shares raise the pre-money share count, which lowers the price, and the existing holders pay for a pool meant for people hired with the investors' money.
A pool in the pre-money is a lower valuation in disguise: $8,000,000 less the pool's $1,000,000 is an effective pre-money of $7,000,000.
Pool in the pre-money, sized to the investor's number
- Good at
The investor's percentage is exactly as quoted
- Watch for
The founders bear all of the new pool's dilution
- Best for
- The investor's opening position
Pool sized to a hiring plan
- Good at
- A smaller top-up, so less pre-money dilution
- The pool matches the people the round will hire
- Watch for
Takes a plan the investor believes
- Best for
- A founder with a real hiring plan
Pool in the post-money
- Good at
Everyone, investors included, pays for the pool
- Watch for
The investor shares the dilution, so the investor resists
- Best for
- Rarely accepted, but worth naming
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Background reading explains; it is never the authority for a rule. Anything marked as a convention is ours, not the rule-maker's.
- Background reading — not an authority
- Y Combinator, Post-Money SAFE User Guide (opens in a new tab)What “post-money” means: post the SAFEs and the old pool, not the round's new poolFree to read
The words this page teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Option pool shuffleSizing a round's new option pool as a percentage of the post-money but creating it in the pre-money, so its cost falls on existing holders and the effective pre-money is the headline pre-money less the new pool's valueConvention
- Option poolShares the board reserves under a stockholder-approved equity plan for future grants of options and other awards. Granted options and the unissued remainder both count in fully diluted shares
- Pre-money valuationWhat a company is priced at immediately before new money comes in. Pre-money ÷ pre-money fully diluted shares is the round's price per share — so whatever the term sheet puts in the pre-money (converting SAFEs, a bigger option pool) is paid for by the existing holders