Option Pool Dilution: Pre-Money and Post-Money Financing Examples

An employee option pool reserves shares for future grants or outstanding awards under the company's equity plan. Venture financings often involve negotiating a pool large enough for expected hiring. The timing of a new pool relative to the financing influences which owners bear the related dilution.

The baseline financing

Assume a company has 10 million fully diluted shares before a financing, an agreed $20 million pre-money valuation and $5 million of new primary investment. With no new option reserve, the price is $2 per share. The financing issues 2.5 million new shares, and the new-money investors hold 20% of 12.5 million shares after closing.

Case A: add two million pool shares before pricing

Suppose two million additional pool shares become part of the pre-money capitalization. The pre-financing fully diluted count rises to 12 million, giving a price of approximately $1.6667. The $5 million round therefore issues three million shares. After closing, the 15 million-share total consists of ten million prior shares, two million newly reserved pool shares and three million investor shares.

Pre-money price = $20M ÷ 12M = $1.6667; new shares = $5M ÷ $1.6667 = 3M

With the stated rounding, pre-existing shares represent 66.7% of the post-financing total, the two million reserved shares represent 13.3%, and the investors represent 20%. The added pool dilution falls on the pre-financing holders through the priced share count.

Case B: add two million pool shares after pricing

Now suppose the same two million reserved shares are created after a financing priced using the original ten million shares. The $2.00 price issues 2.5 million investor shares. Adding the two million reserved shares produces 14.5 million fully diluted shares after the pool change.

After financing and pool creation: 10M original + 2.5M investor + 2M pool = 14.5M shares

The original shares then represent about 69.0%, the new-money investor about 17.2%, and the pool about 13.8%. The investor now shares the pool dilution because the reserve was added after its shares were priced.

What the comparison means

Both cases use the same two million additional reserved shares, $20 million pre-money valuation and $5 million financing. They deliberately do not impose the same final pool percentage. That distinction matters because real term sheets may negotiate a target fully diluted post-money option reserve, which requires solving for the required share count.

Build a fully diluted capitalization schedule

Include outstanding common and preferred shares, existing options, unallocated reserve, warrants, convertible instruments and the new securities under the agreement's definitions. Pre-money and post-money valuation explains the underlying financing price.

The NVCA model financing documents provide reference transaction terms. The parties' executed capitalization definitions and stockholder approvals control the actual option-pool treatment.

How this matters to a venture fund

A pro rata or follow-on decision can change when the option pool changes the fund's expected ownership. Review the actual cap-table scenarios alongside ownership and dilution. Treto's Diligence workspace can preserve the revised cap tables and unresolved questions for approval, while transaction modeling remains with the appropriate professionals.

Questions investors ask

Who is diluted by a pre-money option pool increase?

Under the illustrative structure, the additional pool is included in the shares used to price the round. Existing holders bear the expansion's effect on the pre-financing capitalization. The final allocation depends on the agreed pool target and definitions in the term sheet.

Is a post-money pool always better for founders?

The economics depend on investor pricing, the final option target and the negotiating terms. Moving the pool change after the round can spread dilution across existing and new holders, while an investor may negotiate different pricing to reach a desired stake. Compare complete pro forma cap tables.