Meaning
Calculating the percentage of shares held by each partner before new capital arrives determines the pre-money equity allocation. This process involves looking at the cap table and deciding how many shares to give to founders, early employees and advisors. This math sets the baseline for how much dilution everyone will face when the new money arrives.
Stakeholder Negotiation
Agreement on these numbers often happens during the very first days of a venture when the future value of the firm is unknown. A fair pre-money equity allocation accounts for the different types of contributions made by each participant, such as capital, time or intellectual property. Disagreements at this stage can lead to the departure of early members before the company even launches.
Option Pool
Creation of a reserve for future hires is a standard part of the process that further reduces the founders’ percentage. This pool is usually established before the investment is finalized so that the new investors do not share the cost of that dilution. The size of the pool depends on the hiring plan for the next eighteen months.
Structural Distribution
Finalizing the numbers requires a formal vote by the board of directors and the issuance of stock certificates. Accuracy in these records is essential for maintaining trust with both employees and future investors.
