Meaning
Strategic increase in reserved shares. Investors often require a pre money option pool expansion to ensure enough equity is available for future hires without diluting their new stake. This process occurs during the negotiation of a term sheet for a financing round.
It effectively lowers the valuation of the company from the perspective of the existing shareholders. The size of the pool is typically set to cover the hiring needs of the business for twelve months.
Share Distribution
Reserving shares for employees helps attract talent by offering a stake in the future growth of the enterprise. This pre money option pool expansion shifts the cost of future dilution onto the existing owners. It ensures that the new investors enter with an ownership percentage that is not immediately reduced by the first few hires.
Management must carefully calculate the number of options needed to avoid unnecessary dilution.
Dilution Math
Calculating the impact of the pool involves adding the new shares to the ownership record before the investor’s capital is added. This pre money option pool expansion results in a lower effective price per share for the founders. The mathematical effect is that the current owners bear the full burden of the reserved shares.
A typical expansion might increase the pool to fifteen percent of the total equity.
Expansion Scope
Authorization for the new shares requires an amendment to the corporate charter. The pool only contains shares that are authorized but not yet issued to individuals.
