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.
Please support our efforts by taking a quick survey