Financial Planning
Option Pool Dilution: How to Model a Pool Increase
Compare pre-money and post-money pool scenarios and connect the requested reserve to a documented hiring plan.
What you will learn
- Define an available-pool target precisely
- Reconcile pool shares and financing shares together
- Explain who bears dilution under different timing assumptions
Model an option-pool increase by defining the available reserve being targeted, the timing of the increase, and the share denominator after financing. Then solve the pool and investor shares together. A pool described as 10% can mean very different things before or after a financing.
The exercise is a fully diluted ownership illustration, not an equity-grant approval or employment/tax recommendation. Collect current granted awards, available reserve, proposed financing terms and a hiring plan, then have counsel and the finance owner confirm the capitalization definitions.
Define what the pool target includes
Separate outstanding shares, granted awards, and unallocated reserve. Ask whether the proposed target means the available pool after financing, the total plan including grants, or something else. Also ask who bears the increase under the pricing definition.
Carta’s option-pool guide explains that a pre-money top-up can reduce the price per share and dilute existing holders differently from a later increase. Use actual hiring needs to inform the discussion rather than copying a percentage.
Build a hiring-to-reserve bridge
- List intended roles and timing.
- Separate already approved grants from future planning assumptions.
- Estimate grants on one consistently defined share or percentage basis, reviewed by advisers.
- Include refresh and contingency assumptions explicitly rather than hiding them.
- Compare modeled need with currently available reserve.
- Translate the gap into a proposed financing scenario, without presenting it as a legally approved pool.
A cash hiring plan and an equity reserve are connected but distinct. See the hiring-cost lesson for salary and cash timing.
Work a pre-money pool example
Fictional simplified inputs: Existing holders have 7 million shares. There are no granted options, existing reserve, warrants or convertibles. The company raises $2 million at $8 million pre-money. A newly created unallocated reserve must equal 10% of the post-round fully diluted total and be included in pre-money pricing.
One consistent solution is 1 million pool shares,2 million investor shares and 7 million existing shares. Pre-money shares are 8 million, so the price is $8 million ÷ 8 million = $1. The investor buys 2 million shares for $2 million. Post-round total is 10 million.
Completed pre-money pool scenario
| Bucket | Modeled shares | Post-round fraction |
|---|---|---|
| Existing holders | 7,000,000 | 70% |
| Unallocated reserve | 1,000,000 | 10% |
| New investor | 2,000,000 | 20% |
| Total | 10,000,000 | 100% |
Without the pool increase, the same simplified financing gives the existing holders 80% and investor 20%. Here the pre-money reserve reduces existing holders to 70% while leaving the new investor’s modeled 20% unchanged. Reserved shares are included for this ownership calculation, not falsely described as already granted to employees.
Compare a later pool increase
Now assume the simple round closes first without a pool: existing holders 80%, new investor 20%. Creating a reserve equal to 10% of the enlarged post-pool total then scales both groups by 90%. Existing holders become 72%, investor 18%, reserve 10%.
Timing changes who is diluted in the illustration
| Scenario | Existing holders | Investor | Reserve |
|---|---|---|---|
| Pool included before pricing | 70% | 20% | 10% |
| Pool created after the simple round | 72% | 18% | 10% |
This does not suggest the parties can unilaterally choose timing or that all negotiated financings follow either simplification. It shows why the same headline pool percentage is not enough to compare proposals.
Copy and verify the pool worksheet
Current share/award/reserve record and date: [ ]
Granted awards included: [ ]
Available unallocated reserve: [ ]
Hiring and refresh assumptions / source: [ ]
Proposed target: [available or total pool; before or after financing]
Pre-money pricing inclusions: [ ]
New cash and issue-price assumptions: [ ]
Pool shares / investor shares / final denominator: [ ]
Before/after ownership by bucket: [ ]
Rounding / approvals / counsel questions: [ ]Common errors are counting granted options twice, targeting 10% of pre-round shares while labeling it 10% post-round, or treating the reserve as immediately issued stock. Check that the pool target, cash purchase, share price and total percentages all reconcile. Keep actual grant decisions and required approvals outside the spreadsheet.
Bring the completed model into your term-sheet comparison alongside the priced-round share bridge.
Informational disclaimer
We are not lawyers. This article is for general education only and is not legal, tax, accounting or investment advice. Check with your attorney or accountant before acting on it.