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.
pre investment dilution
Meaning
Reducing the ownership percentage of existing shareholders before a new investment arrives ensures that the cost of future employee incentives is borne by the original owners. This pre investment dilution happens when investors require a certain percentage of the company to be set aside for employees as a condition of the deal. The effect is localized to the founders and early backers who held shares before the new money arrived.
Founder Cost
Early participants pay for the future incentive plan by giving up a portion of their stake before the new investor’s cash is counted. Since pre investment dilution lowers the pre-money share price, it increases the number of shares the new investor receives for their capital. This mechanism is a common point of negotiation in early-stage deals.
Founders often view this as a hidden cost of the financing round. The impact is a lower starting percentage for the original team members compared to the headline valuation.
Cap Table Shift
Calculations for the next round assume that the employee pool is already full and active. When pre investment dilution is applied, the founders find their holding markedly smaller than they anticipated. This cost is the price of securing the capital needed to scale the business.
Investor Protection
New backers use this requirement to ensure they do not face immediate reduction in their stake from the hiring that follows their check. It places the burden of incentivizing the future team on the shoulders of the original builders. This arrangement remains standard in the venture capital industry.