Breaking Down Pre-Money vs. Post-Money Option Pools with Simple Math

Breaking down pre-money vs. post-money option pools with simple math.

Most founders understand that raising money means giving up equity. Fewer understand how dilution actually plays out in practice, especially around option pools, and many VC candidates struggle to explain this clearly in interviews. This "small" term can swing founder and investor outcomes by millions.

What is an option pool?

An option pool is equity set aside today to grant to future employees as stock options over time. It is effectively a hiring budget paid in equity instead of cash.

• Early hires receive options that typically vest over four years with a one‑year cliff.
• Pool sizes at early stages commonly range from 10–20% of the company.
• Pools are often topped up in later rounds, causing additional dilution.

The key nuance is not whether to have a pool, but who absorbs the dilution when the pool is created or expanded.

Pre-money vs. post-money pools

Here is the critical distinction in term sheets:

• Pre‑money pool – The option pool is created before the new investor's capital goes in. Dilution falls on founders and existing shareholders; the new investor's negotiated percentage is protected.
• Post‑money pool – The pool is created after the investor has bought in. Everyone, including the new investor, shares the dilution from the new pool.

Most investors will push for the pool to be built into the pre‑money valuation because it effectively increases their ownership without increasing the check size.

Mini math setup

Step 1: Start simple

• Company value today (pre‑money): 20M.
• Founders own 100%.

Step 2: Bring in an investor

• A VC invests 5M at a 20M pre‑money valuation.
• Post‑money valuation = 20M + 5M = 25M.
• Investor ownership = 5M ÷ 25M = 20%.
• Founders ownership = 80%.

So far, there is no option pool, so all dilution is just from the financing itself.

Case A: No option pool

If no option pool is created in this round:

• Founders: 80%
• Investor: 20%
• Option pool: 0%

Total = 100%. There is no further dilution beyond the financing.

Case B: Add a 15% option pool pre-money

Now assume the term sheet requires a 15% option pool pre‑money. The investor still expects to own 20% of the company after the round, so the pool must come entirely out of the founders' side.

The math target is:

• Investor: 20%
• Option pool: 15%
• Founders: 65%

Check: 65% + 15% + 20% = 100%.

Compared with the "no pool" case:

• Founders dropped from 80% to 65% → they gave up an extra 15 percentage points.
• The investor remained at 20% but effectively benefited from the founders absorbing all the dilution from the pool.

This is why pre‑money pools are often described as "founders paying for future employees on behalf of the new investor."

Case C: Add a 15% option pool post-money

Now imagine the same company and same deal, but the pool is created post‑money (after the investor owns 20%).

Start from the no‑pool cap table:

• Founders: 80%
• Investor: 20%

To add a true 15% pool, everyone gets diluted proportionally by the new shares.

Let total ownership before pool = 100%. After adding a 15% pool, existing holders now represent 85% of the company (because 15% is the new pool). Their new percentages are:

• Founders: 80% × 0.85 = 68%.
• Investor: 20% × 0.85 = 17%.
• Option pool: 15%.

Check: 68% + 17% + 15% = 100%.

In this post‑money scenario:

• Founders go from 80% → 68% (12 points of dilution).
• Investor goes from 20% → 17% (3 points of dilution).
• Everyone shares the cost of the pool creation.

Why this matters in negotiations (and in VC interviews)

For founders:

• A "pre‑money 15% pool" can quietly move you from 80% down to 65% in one round, even though the investor's headline percentage never changes.
• Always model: "What is my ownership after financing and after the required pool top‑up?" not just "What is the valuation?"

For aspiring VCs:

• Being able to walk through these numbers out loud shows that you understand how terms interact, not just definitions.
• Interviewers will listen for whether you grasp that option pools are about who pays for future hiring capacity, not just "do we have one or not."

Ready to calculate your equity dilution? Explore Aikya for clear VC term explanations.