Option Pool Creation
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 each of the methods used to create an option pool. In both pie charts, you’ll notice that the option pool size is 20%, 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 investors bought half the company ($3M investment on a $3M pre-money valuation), that leaves 50% for the founders and option pool. Since the option pool accounts for 20%, logically the founders only own 30% of the company. In the bottom the option pool is created from the post-money side, which dilutes both the founders and investors. This yields to the founders and investors both owning 40%. It should be noted that the price per share for each example is different.
