Option Pool Creation

Posted on 17. Aug, 2008 by in Basics, Graphical Examples

One of the more subtle points of valuation is option pool creation. The first method is an option pool created from the pre-money side, but calculated on a post-money basis. The second is an option pool created from the post-money side, and calculated on a post-money basis. This is where a graphical example helps dramatically.

Illustrated on the right is the difference for methods used to create an option pool. In both pie charts, you’ll notice that the option pool size is 10%, as this is computed on a post-money basis (after the investment). On the top is the option pool created from the pre-money side. As the Investor bought 40% the company ($2M investment on a $3M pre-money valuation), that leaves 60% for the founder and option pool. Since the option pool accounts for 10%, logically the founder own’s 50% of the company. In the bottom the option pool is created from the post-money side, which dilutes both the founder and investor. Before the option pool, the founder owned 60% while the investor owned 40%. Dilution to both sides is based on the 60/40 ratio. Therefore, the founder goes from 60% ownership to 54%. The investor goes from 40% to 36%.

The equations are shown for these two situations. Please note that you can update the values and watch the equations solve for other values as you desire.

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  • John

    A friend and I have been advised (not by a lawyer) to start with an 80% option pool. This actually broke your model :-)

    I’m thinking my advice might be wrong and 80% way too high?

    • Ty Williams

      yes that is way too high based on the model above

  • Berrak Kocaoglu

    Hello- I am having a bit of trouble understanding the pre-money calculation. Could you explain how you got to the % ownership ? How do i get that the founder ownership is 51.67% from the 4 metrics entered above?