Option Pool Top-Ups: Model the Dilution Behind the Headline

An option-pool requirement can change founder ownership even when the headline valuation stays the same. To understand the effect, model the pool, the incoming investment, and the fully diluted denominator together. A percentage without a defined denominator is not enough to evaluate the term.

Carta’s option-pool guide distinguishes a reserve from issued shares and explains why pre-money pool treatment can shift dilution toward existing holders. The arithmetic below is an educational simplified example, not legal, tax, valuation, or personalized investment advice.

State what is in the denominator

Start with the current capitalization: issued shares, outstanding options and other rights, unallocated reserve, and any converting instruments. Determine how the proposed transaction defines fully diluted capitalization. Do not assume every term sheet includes the same items in the same way.

For the simplified example, assume there are eight million founder shares, no other holders or instruments, and no existing option reserve. The investor puts in $2 million at an $8 million pre-money valuation. The term also requires an unallocated pool equal to 10% of the post-financing fully diluted capitalization, included in the pre-money share count.

These assumptions intentionally remove convertibles, multiple share classes, warrants, and fees so the pool mechanism is visible. Real transactions need the complete capitalization and document definitions.

Calculate the investor percentage first

With $8 million pre-money and $2 million new investment, the simplified post-money valuation is $10 million. The investor’s economic share in this example is $2 million / $10 million = 20%.

The target unallocated pool is another 10% after the financing. With no other interests in the example, the founder therefore holds the remaining 70%. The pool does not appear magically after calculating an 80% founder holding; it must fit into the same total.

This gives a quick percentage check: founder 70% + investor 20% + reserve 10% = 100%. If your spreadsheet sums to 110%, it is mixing denominators or applying a percentage at the wrong stage.

Solve for the share counts

Let the post-financing fully diluted total be T. The founder’s eight million shares represent 70% of T, so T = 8,000,000 / 0.70, approximately 11,428,571 shares.

The pool is 10% of T, approximately 1,142,857 shares. The investor receives 20% of T, approximately 2,285,714 shares. Before financing, the fully diluted count used for pricing is eight million plus the pool, or approximately 9,142,857.

The price per share is $8,000,000 / 9,142,857, approximately $0.875. Dividing the $2 million investment by $0.875 produces approximately 2,285,714 investor shares, matching the earlier calculation.

These rounded values are for explanation. A real closing model must use the agreed rounding and share issuance rules and reconcile exact totals. Do not make a legal document depend on rounded display values.

Compare the no-pool and post-financing cases

Without a pool in this simplified transaction, the founder would have 80% and the investor 20%. The pre-money pool requirement changes the founder’s post-financing percentage to 70% while the investor remains at 20%.

For comparison, suppose the financing first creates that 80/20 ownership and a new pool is then added so it represents 10% of the expanded total. Both existing percentages are multiplied by 90%: founder 72%, investor 18%, pool 10%.

These are different contractual structures, not alternative ways to calculate the same deal. The example shows why “a 10% pool” is incomplete language unless it says when the pool is measured and who bears the expansion.

Budget the pool from a hiring plan

List intended roles, timing, proposed grants, refresh grants, and existing unallocated capacity. Keep grant assumptions distinct from market benchmarks unless you have actual current evidence for those benchmarks.

Avoid treating all reserved shares as already granted to employees. A reserve is capacity for future awards; individual grants, vesting, exercise, and ownership have separate mechanics. Explain those differences when communicating percentages to candidates.

If the company already has a reserve, model the incremental top-up rather than adding the entire target again. Also check whether granted but unexercised options are counted separately from the unallocated amount in the transaction’s definitions.

Review the model before agreeing

Reconcile every holder’s before-and-after count, the price per share, new money, total shares, and percentage sum. Add scenarios for different hiring needs and pool targets. Keep each scenario’s assumptions visible beside its result.

Have qualified counsel and the relevant finance professionals review the actual instruments, approvals, local rules, and tax implications. A clean spreadsheet demonstrates internal arithmetic; it does not establish that the proposed structure is legally appropriate or fair.

An additional check is whether the target pool means unallocated capacity only or includes existing awards. Two models can use the same percentage and still reserve different numbers of shares when that definition differs.

Conclusion

Model the pool inside a defined capitalization rather than subtracting a headline percentage afterward. The timing and denominator determine dilution, and a bottom-up hiring plan helps explain why the requested reserve is needed.