“We’ll value you at $8 million” sounds like one number. In a term sheet it is at least two, and a third hides in the option pool clause. Founders who compare offers on the headline alone can pick the lower one.
Pre-Money and Post-Money: The Definitions
UK law firm Ashfords, in its anatomy of a term sheet, defines pre-money valuation as the value of the company immediately before an investment round, calculated on a fully diluted basis (all outstanding shares, convertible securities and employee options). Post-money, it says, “equals the pre-money valuation plus the amount of investment.”
The investor’s stake follows directly: investment ÷ post-money valuation. Ashfords’ example is £10m pre-money plus a £2m investment, giving £12m post-money, so the investor owns 16.67% and existing shareholders keep 83.33%.
Post-Money SAFEs Flip the Question
Y Combinator’s post-money SAFE fixes ownership instead of price. YC says the ownership you sell “equals the investment amount divided by the valuation cap,” with a $500k investment on a $6.7M post-money cap giving about 7.5%. It adds that the post-money cap is “post” all the money raised on SAFEs, and also “post” the options and option pool that existed before the financing. For how those instruments compare with notes, see SAFE vs. convertible note.
The Option Pool Shuffle
Investors usually want a pool of unissued options large enough to hire with until the next round. The question is who pays for it. Allied’s guide to pre-money and post-money option pools describes the two structures:
- Pre-money pool: the pool is created before the investment, so it counts inside the pre-money valuation. The founder, Allied says, “absorbs 100% of that dilution before the investor’s check is even calculated.”
- Post-money pool: the pool is created after the investment, so the new investor shares the dilution.
Ashfords makes the same point: whether the pool sits in pre- or post-money “significantly affects founder dilution,” investors typically want it created before the investment, and it recommends founders negotiate for it to be created after. Its example is a £10m pre-money with a 10% pool created beforehand, which it says drops the effective pre-money to £9m.
LegalVision’s explainer on the option pool shuffle describes it as an investor wanting a bigger pool but wanting existing shareholders to pay for it, and advises founders to negotiate a higher pre-money to cover it, or negotiate the shuffle out.
Worked Example
A hypothetical with round numbers. Founders hold 9,000,000 shares and there is no pool yet. An investor offers $2M at an $8M pre-money, so post-money is $10M and the investor expects 20%. The investor also wants a 10% pool, measured on the fully diluted post-round company.
Pre-money pool (the shuffle). The investor still gets 20% and the pool 10% of the post-round total, so founders hold the remaining 70%. That makes the total 12.86M shares (9M ÷ 0.7) and the price about $0.778 per share. Founders’ 9M shares are worth about $7.0M at that price: the $8M headline less the $1M pool.
Post-money pool. The investor buys at $8M ÷ 9M = $0.889 a share and receives 2.25M shares. The pool is then added so it equals 10% of the final total: 1.25M shares, 12.5M in all.
| Ownership after the round | Founders | Investor | Option pool |
|---|---|---|---|
| Pre-money pool | 70.0% | 20.0% | 10.0% |
| Post-money pool | 72.0% | 18.0% | 10.0% |
Same headline, same $2M, same pool size: a two-point difference in founder ownership, and the investor’s effective ownership falls from 20% to 18% when it shares the cost. On a company that later sells for $100M, two points is $2M. (Ignores later rounds, preferences and tax; see liquidation preference.)
What Founders Should Do
- Compare offers on effective pre-money. Subtract the value of any pool top-up from the headline, as Ashfords does, and compare the result.
- Size the pool from a hiring plan. Allied notes there is no legal requirement for a 10% pool: “a 10% pool is common, not mandatory.” Build it from the hires you will actually make before the next round.
- Negotiate the placement or the price. Ask for the pool to be post-money, or raise the pre-money to cover it, as LegalVision suggests.
- Model the cap table, not the headline. Our equity split and vesting guide, 409A guide and valuation guide cover the surrounding numbers, and anti-dilution covers what happens if the next round is lower.
FAQ
What is the difference between pre-money and post-money valuation?
Pre-money is the company’s value before the new investment; post-money is pre-money plus the money invested. The investor’s percentage is the investment divided by post-money.
Is the option pool part of the pre-money valuation?
Often, yes: investors commonly ask for it to be created before the round, which puts the cost on existing holders. It is negotiable.
What is the option pool shuffle?
Moving the cost of a larger option pool into the pre-money valuation, so existing shareholders bear it and the effective pre-money falls.
Which is better for founders, a higher pre-money or a post-money pool?
Neither alone. Compare the effective pre-money after the pool and the founders’ fully diluted percentage.
General information, not legal or tax advice; have a startup lawyer review the term sheet. For a book-length treatment, Brad Feld and Jason Mendelson’s Venture Deals is the standard reference. More in the finance section on FutureSharks.
