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.
post financing pool
Meaning
Establishing an equity pool immediately after a funding round provides the necessary shares for subsequent hires according to the new capitalization plan. The post financing pool is sized to accommodate the hiring needs of the company until the next expected milestone. It stops being a distinct entity once the shares are integrated into the general option plan.
Investment Structure
Venture capitalists often insist that the employee shares be accounted for in the post-money valuation to protect their own ownership percentage. When a post financing pool is created, it effectively reduces the ownership of the existing shareholders to make room for new hires. This allocation is a standard requirement in professional term sheets.
Recruitment Capacity
Growth plans are tied directly to the number of shares available to attract new leadership and technical staff. Because the post financing pool provides a clear runway for expansion, it allows the founder to move quickly in a competitive labor market. The receiver of these shares gains a future interest in the company in exchange for their current labor.
Capacity to scale is preserved when the pool is large enough to cover all planned executive hires. This allocation provides the fuel for the next stage of the corporate lifecycle.
Dilution Math
Shares in the pool represent a potential future dilution that everyone on the cap table has agreed to accept. Negotiating the size of this pool is a primary part of the exchange between the founder and the investor. It ensures that the company is properly equipped to build its team for the next phase.