Educational only — not investment, legal or tax advice.
Two term sheets both say “$8 million pre-money”. One of them is worth noticeably less to you. The difference is usually a single line about the option pool, and it is one of the most common ways founders give up value without realising it.
What the option pool is
An option pool is a block of shares set aside for future employees, advisers and other service providers. Investors want one in place before they invest, because they expect you to hire with equity, and they do not want those future grants to dilute them.
That last part is the whole story.
Where the pool sits changes who pays for it
Term sheets usually ask for the pool to be created or topped up before the investment, as part of the pre-money valuation. That means only the existing shareholders (you and your earlier backers) are diluted by it. The new investor is not.
Worked example
Example, hypothetical numbers. An investor offers $2M at an $8M pre-money, so $10M post-money. The term sheet asks for an unallocated option pool equal to 15% of the post-money company. You currently own 100% and have no pool.
Option A: pool created before the money (the usual ask)
| Holder | Ownership after the round |
|---|---|
| Founders | 65% |
| New option pool | 15% |
| New investor | 20% |
Option B: pool created after the money (shared dilution)
| Holder | Ownership after the round |
|---|---|
| Founders | 68% |
| New option pool | 15% |
| New investor | 17% |
In Option A, the 15% pool comes entirely out of the founders’ side. The $1.5M worth of pool (15% of $10M) is effectively subtracted from your $8M pre-money, so your effective pre-money is $6.5M. Same headline, very different deal.
How to negotiate it
- Size the pool to a hiring plan, not a round number. List the hires you will make before the next round and what each will realistically receive. If that adds up to 8%, a 15% pool is a 7-point gift to the investor.
- Count existing unallocated options. If you already have an unused pool, it should count toward the target.
- Talk in effective pre-money. Ask: “What is the pre-money if the pool is excluded?” It reframes the discussion in real numbers.
- Trade, don’t fight. If the investor insists on a large pre-money pool, a slightly higher headline valuation can offset it.
From the investor’s side of the table
In term sheet negotiations I have led, the pool was often the point founders noticed last and regretted first. Investors are not being sneaky; they are protecting their ownership. But a founder who arrives with a credible hiring plan usually gets a smaller pool, because it is hard to argue for shares nobody plans to grant.
The short version
Always ask where the pool sits. A pool carved out of the pre-money is a price cut, and you should negotiate it like one.
Sources
Written by Fabian Cisneros. Educational only — not investment, legal or tax advice. See the full disclaimer.
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