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.
true down provision
Meaning
A true down provision belongs to the class of contractual adjustments that calibrate equity ownership when subsequent financing rounds occur at lower valuations. The true down provision specifically governs the mathematical restoration of founder stake percentages through the automatic issuance of additional shares without further capital contribution. The mechanism operates whenever new investors purchase equity below the price paid during the initial incorporation event.
The boundary where the rule ceases to function arrives when the authorized share pool becomes exhausted or when waiver thresholds override the automatic adjustment.
Valuation Adjustment
The process begins the moment a priced equity round closes at a share price beneath the benchmark established by the founders. Numerical dilution ordinarily reduces the proportional holding of the early participants as fresh capital enters the corporate structure. The adjustment formula recalculates the conversion ratio by factoring the lower valuation against the prior capital contributions.
Market participants negotiate the extent of the arithmetic correction before signing the definitive shareholder agreement.
Capital Dilution
Founders absorb substantial costs in equity capacity when ownership percentages contract during successive funding cycles. The provision acts as a corrective instrument that shifts dilution away from the original builders and onto the broader capitalization table. Early investors often resist the resulting concentration of ownership because their own relative holdings face contraction.
The mechanism creates friction during syndicate formation since subsequent financiers evaluate the overhang created by prior protective clauses.
Equity Preservation
The adjustment serves as an explicit safeguard against the severe devaluation of early sweat equity during market contractions. Ownership stability depends entirely upon the precise wording negotiated during the initial incorporation financing event. Subsequent corporate restructuring rounds routinely modify the baseline calculations to accommodate new institutional participants.
The mathematical output determines the final distribution of voting power long after the founding team establishes the operating entity.