Post-money equals pre-money plus the new investment. But when investors require an option pool to be created inside the pre-money valuation, the existing shareholders bear its full cost.
13 min read · Level 3
The option pool shuffle is the clearest example I know of why investors should negotiate price per share rather than valuation. A valuation is a headline that can be adjusted underneath; the price per share after all the mechanics is what actually determines who owns what.
The basic relationship:
Post-money valuation = pre-money valuation + new investment Investor ownership = new investment / post-money valuation
An investor puts 2,000,000 into a company at an 8,000,000 pre-money valuation:
Post-money 10,000,000 Investor ownership 2,000,000 / 10,000,000 = 20%
If the company has 8,000,000 shares before the round and no option pool, the price per share is 8,000,000 / 8,000,000 = 1.00. The investor receives 2,000,000 new shares, and founders keep 80%.
The option pool shuffle. Now the investor requires a new option pool equal to 10% of the post-money company, created before the investment. Founders will own 100% - 20% - 10% = 70%.
Founders' shares 8,000,000 = 70% of total Total shares after the round 8,000,000 / 0.70 = 11,428,571 Option pool (10%) 1,142,857 Investor (20%) 2,285,714 Price per share 2,000,000 / 2,285,714 = 0.875
The headline pre-money is still 8,000,000. But the founders' 8,000,000 shares at 0.875 are worth 7,000,000. The 1,000,000 of value in the new pool (1,142,857 x 0.875) came entirely out of the pre-money valuation - out of the existing shareholders.
Because the headline valuation is not the whole story. Two term sheets both quoting an 8,000,000 pre-money can give founders and existing investors very different outcomes depending on how the option pool is handled.
For an angel who invested earlier, this matters directly: the shuffle dilutes existing holders, not the new investor.
Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
Two offers, same headline.
Offer Pre-money Investment New pool Founders' effective price value A: no new pool 8,000,000 2,000,000 none 8,000,000 (founders 80%) B: 10% post-money pool, pre 8,000,000 2,000,000 in pre-money 7,000,000 (founders 70%)
Offer B is effectively a 7,000,000 pre-money valuation for the existing shareholders, dressed as 8,000,000. An offer at 7,500,000 pre-money with the pool created after the round could be better for founders than Offer B despite its lower headline.
Comparing term sheets by headline pre-money valuation without checking where the option pool is created and how large it is.
Read the term sheet for how the option pool is defined and whose ownership it comes from.
Divide the investment by the investor's new shares after accounting for the pool.
Multiply existing shares by the effective price to find the real pre-money value for current holders.
Ask for a hiring plan that justifies the pool; an oversized pool dilutes existing holders unnecessarily.
When evaluating a priced round, especially as an existing shareholder or when comparing competing offers.
Do not assume the shuffle is always unfair. A company does need options to hire; the issue is sizing and clarity, not the existence of a pool.
Founders and advisers frequently describe term sheets in which the required option pool exceeded what the company's hiring plan over the next round would need, with the unused portion effectively reducing the founders' and earlier investors' ownership. Common advice in startup legal and advisory materials is to size the pool to a specific hiring plan.
Ask for the hiring plan behind a pool size. An unjustified large pool is a lower valuation in disguise.
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