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.
divisor mathematics
Meaning
The computational method used to adjust conversion prices and equity ownership ratios prevents the devaluation of existing shares during down rounds. Investors and founders employ divisor mathematics to recalculate the share price of preferred stock when new securities are issued at a lower valuation. This mathematical adjustment ensures that the protective provisions of the share certificate are accurately executed.
It ceases to apply once all preferred shares have converted into common stock.
Calculation Method
Applying the mathematical formula divides the aggregate consideration received by the total outstanding shares before the round to establish a new conversion factor. This adjustment requires precise historical capitalization data to function correctly.
Capital Allocation
Adjusting the divisor changes the distribution of economic gains upon a liquidity event. Givers of capital receive a larger share of the proceeds, while the receiving founders face a reduction in their final payout. This process represents a redistribution of economic value within the existing capitalization table.
Dilution Prevention
Founders must understand how these calculations affect their long-term ownership percentage when structuring protective terms. The application of divisor mathematics can significantly increase the number of common shares issued upon conversion. This protects early investors while diluting the founding team’s holdings.