Structuring Employee Option Pool Reserves Pre Money Financing
Pre money option pool reserves expand the fully diluted share count before investment, reducing share prices and forcing common owners to bear hiring dilution.
convertible instrument
Meaning
Financial vehicles that provide immediate capital in exchange for the right to future equity ownership. The convertible instrument functions primarily as debt during its initial phase and carries an interest rate alongside a maturity date. This structure offers a way for early funding where a definitive valuation remains difficult to establish between parties.
It allows founders to delay the administrative burden of a full equity round while securing the necessary runway for growth. This structure simplifies early funding.
Conversion Trigger
Transformation into stock occurs when a predefined event takes place, such as a qualified financing round or a change in company control. This shift ensures that debt holders receive shares at a price determined by later institutional investors. Conversion is the goal.
Valuation Cap
Investors often seek protection against high valuations by setting a maximum price at which their debt converts. The convertible instrument uses this ceiling to reward early risk by guaranteeing a minimum equity stake regardless of the price paid by future participants. Caps protect the upside.
Interest Accrual
Unpaid interest accumulates over the life of the debt and typically converts into shares along with the principal amount. This accumulation increases the total number of shares issued to the lender at the time of conversion.