Option Pool Shuffle
The effect of putting the option pool in the pre-money: the headline valuation is agreed, then the pool is carved out of it before the price per share is set, so the founders are effectively valued at the headline less the pool. A $12m pre-money with a 10% post-money pool on a $15m post-money prices what existed before the round at $10.5m. See it move at /labs/cap-table.
How a startup is financed · 6 of 26Next: Founder Dilution
Why Option Pool Shuffle matters in interviews
The option pool shuffle is the term-sheet mechanic that most reliably separates a candidate who has read about venture from one who has done the arithmetic, and it is a favourite second question after "what is pre-money". It is also the single most common way a founder is quietly paid less than the headline says.
How it works in practice
The mechanic. The investor agrees a pre-money valuation and, in the same term sheet, asks for an unallocated option pool of, say, 10% of the post-money fully diluted count, to be created before the money goes in. The pool shares are added to the count the pre-money is divided over, so the price per share falls and the founders and any earlier investors are diluted by the pool before the new money dilutes them again. The investor is not diluted by the pool at all.
Worked. $12m pre-money, $3m cheque, 10% post-money pool, founders and a converting SAFE holding 8,888,889 shares. Pool in the pre: the top-up is 1,269,841 shares, the price is $1.18125 and what existed before the round is valued at 8,888,889 × $1.18125 = $10.5m. Pool in the post: the price is $12m ÷ 8,888,889 = $1.35, the founders and SAFE are valued at the full $12m, the investor gets 2,222,222 shares and is then diluted to 18% when the pool is created. Same headline, $1.5m difference in what the founders were paid.
What to do about it. Size the pool from a hiring plan for the next twelve to eighteen months rather than from a convention. A pool of 8% that covers the plan is worth more to the founders than a 15% pool that covers an investor’s habit, and a lead who cannot name the hires the pool is for is asking for a lower valuation by another name. The lab at /labs/cap-table shows the pool moving between pre and post and prints the effective pre-money each time.
What candidates get wrong
- Negotiating the pre-money and accepting the pool as boilerplate. The pool is a valuation term.
- Counting the existing unallocated pool twice. Only the top-up to the target is new dilution; options already reserved are on the table already.
- Assuming the pool is bad. Employees need options and the company will grant them either way. The question is who pays for the shares, not whether they exist.
Option Pool Shuffle: frequently asked questions
What is the option pool shuffle?
The practice of creating or enlarging the employee option pool as part of a financing round but before the new money goes in, so that the pool is counted inside the pre-money valuation. The founders and existing investors are diluted by the pool; the new investor is not. The effect is that the founders receive the headline pre-money less the value of the pool top-up, which on a $12m pre-money with a 10% pool in a $15m post-money is $1.5m less.
Should the option pool be in the pre-money or the post-money?
From the founders’ side, in the post-money, so that the investor shares the dilution. From the investor’s side, in the pre-money, so their stake is not reduced by hires the company was always going to make. Most term sheets say pre-money; what a founder can realistically negotiate is the size of the pool, which should be set from a hiring plan rather than a round number.
Practise it
Take a company from founding through a SAFE and a priced seed round. Set the cap, the pre-money and the option pool, watch the price per share and every holder’s stake move, then check your own arithmetic against the table.
Open Cap Table Builder, free, 15 minWhere Option Pool Shuffle comes up
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