Meaning
Capitalization tables are structured after a funding agreement is signed to define the final distribution of equity among founders, employees, and investors. The post term sheet allocation establishes how many shares are reserved for the option pool and how the dilution is distributed among the original stakeholders. This process occurs before the closing documents are finalized to ensure all parties agree on the final ownership percentages.
It prevents surprises when the transaction completes.
Option Pool
Setting aside shares for future hires is a standard requirement imposed by venture capitalists. During the post term sheet allocation, the size of this option pool is negotiated, and it directly affects the pre money valuation of the startup. A larger pool dilutes the existing founders further before the new investment is added.
This requires careful planning to balance future hiring needs against current ownership retention.
Dilution Effect
Distributing ownership to new investors inevitably reduces the percentage held by early stage participants. The dilution effect of this process measures how much of the company the original team retains after the funding round. It is a necessary cost of acquiring the capital needed to scale the business.
The absolute value of the remaining shares is expected to increase even as the ownership percentage decreases.
Final Closing
Completing the equity distribution prepares the startup for the execution of the final investment agreements. This final closing step locks in the capitalization table and provides a clear baseline for future financial rounds.
