The option pool shuffle

Almost every Series A term sheet says something like: the pre-money valuation includes an unallocated employee option pool equal to 10% or 15% of post-money fully diluted capitalization.

Read that carefully. The pool is measured as a post-money percentage, but it is created pre-money. Founders and existing holders absorb 100% of that top-up. The new investors do not. That is the option pool shuffle.

The big idea

You and a new roommate agree they will own 20% of the apartment after they move in. They also insist a 15% empty room be reserved for future guests — and that empty room comes out of your existing space, not theirs. They still own a clean 20%.

The analogy breaks if you negotiate a post-money pool, where dilution of the reserve is shared. Investors rarely agree without a lower headline valuation.

A useful sanity check on a priced round:

effective pre-money ≈ headline pre-money − (post-money × pool %)

On a $32M pre / $8M raise / 10% post-money pool:

post-money          = $40M
pool dollar value   = $40M × 10% = $4M
effective pre-money = $32M − $4M = $28M

Existing holders are really being valued at ~$28M, not $32M. The other $4M of "pre-money" is reserved for people you have not hired yet. A bigger required pool is economically identical to a lower pre-money.

Walking through the 15% ask

Pre-money agreed: $32M. Investor puts in $8M → headline post-money $40M → investor owns 20%.

Cap table before any pool change (simplified): founders 85%, existing pool 5%, seed investors 10%. FD shares = 10,000,000.

Investor requires 15% pool post-money. Post-money, investor owns 20%, so other holders (including pool) own 80%. A 15% post-money pool is:

Pool as % of pre-money holders' slice = 15% / 80% = 18.75% of the pre-round FD

The pre-round table must be reshaped until the pool is 18.75% of pre-money FD; then Series A buys 20% of the new total. Founders and seed get diluted by that expansion and by the 20% sale.

Same $8M at $32M headline with a 15% post-money pool: existing holders keep 65% post (100 − 20 − 15). That extra ~5 points versus a 10% pool is roughly a $2M haircut on effective pre-money ($40M × 5%). Always model pool size, not just valuation.

Common mistakes

• Winning $2M of headline valuation and losing $3M to an oversized pre-money pool.
• Approximating with vibes during negotiation. Every extra point of post-money pool carved pre-money costs founders more than one point once you also sell the round.
• Skimming "10% pool" and assuming outstanding options already cover it. Counsel may still expand available reserve. Read the exact language.

Check yourself

$32M pre, $8M in, 10% post-money pool carved pre-money. What is effective pre-money?

About $28M — $32M minus 10% of the $40M post.

Who absorbs the pool top-up in the market-default shuffle?

Founders and existing holders. The new investor's 20% stays 20%.

Key takeaways

• Post-money pool % + pre-money creation = founders pay for future hires.
• Effective pre-money ≈ headline pre − (post × pool%).
• A larger pool is a stealth valuation cut.
• Size from a plan; trade pool size against valuation explicitly.

Further learning

Option pool dilution and SAFE conversion in the same series:

Next: pool refreshes.