Model who absorbs an option-pool top-up before signing the round

A request for a 20% option pool needs several clarifications: 20% of which share count, before or after the financing, and including or excluding awards already granted? Record the available reserve separately from outstanding awards. Otherwise, the parties can agree on a percentage while expecting different numbers of shares for future hiring.

Carta's option-pool guidance explains that an increase included in pre-money capitalization shifts dilution to existing holders, while an increase after investment also dilutes the new investor. Use the actual term-sheet definition and have counsel review it. The order is an economic term, not a spreadsheet formatting preference.

Assume a hypothetical company has eight million issued shares and one million unallocated pool shares, with no other instruments. An investor contributes $4 million at a $16 million pre-money valuation. The proposed pool must equal 20% of the final fully diluted count. That target is an illustration, not a recommendation or market norm.

If the pool increase is included before pricing, the new investor retains 20% after closing. The pool is 20%, leaving issued holders 60%. Eight million divided by 60% gives a final total of approximately 13.333 million share equivalents. The pool therefore needs approximately 2.667 million shares, a top-up of approximately 1.667 million over its existing reserve.

Pre-money capitalization is approximately 10.667 million equivalents, giving a $1.50 financing price. The $4 million buys approximately 2.667 million new shares. Retain full precision until legal issuance rounding is applied; the rounded figures here explain the proportions rather than specifying an executable share issuance.

Now assume the same cash and valuation, but price the investment on the existing nine million fully diluted equivalents before increasing the pool. The price is approximately $1.7778 and the investor receives 2.25 million shares. There are then 11.25 million equivalents, including the existing one-million reserve.

To make the reserve 20% afterward, add 1.5625 million pool shares. The final count is 12.8125 million, with a 2.5625-million reserve. Issued holders own approximately 62.44%, the investor 17.56% and the reserve accounts for 20%. The same post-closing pool percentage produces a different division because the investor shares the later dilution.

List expected hires and refresh awards over the period the reserve should cover. Distinguish approved grants, promised but unapproved awards, outstanding options and genuinely available shares. Ask legal and compensation advisers how each belongs in the transaction's capitalization definition. Do not count an award in both the outstanding category and the unused reserve.

Present a smaller and larger hiring case, showing the resulting share requirement. This creates a negotiation about the planned team rather than an unsupported percentage. If the proposed reserve exceeds the company's expected grants, ask which additional hiring assumptions justify it and when they would become relevant.

Changing the reserve can also change conversions or other instruments whose terms reference capitalization. Rerun the complete model when those instruments exist. The simplified example intentionally excludes them so the order of the pool increase is visible.

Have the final documents and model use the same measurement date, share categories, reserve target and ordering. Confirm which approvals are required with counsel. A negotiated pool does not by itself grant a particular employee an award or establish its tax treatment.

Retain the before-and-after counts and the hiring assumptions management accepted. At closing, reconcile actual issuances and the approved reserve to that version. Future grant planning can then begin from the available shares the company actually authorized, with the financing's dilution understood.