Option pool shuffle

What it means

The option pool shuffle is the practice of agreeing an option pool as part of a funding round and creating it before the new money arrives, rather than after. The pool is a block of shares set aside for future employees. Because the investor's percentage is calculated once the pool already exists, the shares reserved for it come out of the existing holders alone. The word shuffle is not an accusation of bad faith. It is market standard, it appears in most term sheets, and it describes a real movement of value that is rarely spelled out in the conversation where it is agreed.

Why it matters

It is the largest gap between what a founder thinks a round costs and what it actually costs. A founder who models a round using only the headline valuation and the amount raised will get the right number for the investor's stake and the wrong number for their own. The pool sits entirely on their side of the line. On a typical seed round the difference between placing a ten percent pool before the money and after it is worth roughly two percentage points of the company to the founders, which on a later exit is a larger sum than most of the terms that get argued about for hours.

Worked example

You hold 10,000,000 shares and raise EUR 2m at an EUR 8m pre-money valuation. With no pool the price per share is EUR 8m divided by 10,000,000, or EUR 0.80, and the investor buys 2,500,000 shares for twenty percent of a 12,500,000 share company. Now add a ten percent pool before the money. The pool and the investor's shares both have to fit inside the post-money count, so the price per share falls to EUR 0.70. The investor still gets twenty percent, the pool takes ten percent, and you are left with seventy percent instead of the seventy two percent you would have held had the pool been created after the money. That two points came from you and from nobody else.

The common mistake

Negotiating the valuation hard and the pool not at all. A founder will spend a week pushing an EUR 8m pre-money to EUR 9m, a gain of a little over two percentage points, and then agree to a fifteen percent pre-money pool in a single sentence because it sounds like an administrative detail about hiring. The second decision is worth more than the first and takes less time to make. The other frequent error is accepting a pool sized by a round number rather than by the hiring plan, which quietly hands over shares for roles nobody has decided to fill.

In practice

The term sheet will say something like a pool equal to ten percent of the fully diluted post-money capitalisation, and the words that matter are fully diluted and post-money, because together they mean the pool is counted before your price is set. The negotiating position that works is not a general objection but a specific hiring plan: these four roles, at these grant sizes, over the next eighteen months, which comes to seven percent rather than twelve. Investors will usually engage with a list. They rarely engage with a request to make the pool smaller because it feels large. There is a second position worth knowing about, which is to ask for the pool to be created after the money, or to be split so that the investor funds part of it. This is less commonly granted than a smaller pool, but it is asked for often enough to be a normal request rather than an unusual one, and an investor who refuses both a smaller pool and a shared one has told you something useful about how the rest of the negotiation will go. Whichever way it lands, model the round both ways before you agree, because the difference is a number and the conversation goes better when you can name it.

What to ask

Ask two questions and ask them early. First: is the pool created before or after the money, and if before, will you split it. That single question is worth more than a week of arguing about valuation, and asking it plainly signals that you have modelled the round rather than skimmed it. Second: what does the investor expect the pool to be spent on, because if their answer is a specific list of hires you can compare it to your own plan, and if it is a general reserve you can reasonably ask why it is being sized without one. When you get an answer, put both placements into the calculator and quote the founder percentage under each. Term sheets are argued in percentages and settled in percentages, so bring the percentage rather than the objection. Get the answer in writing before the term sheet is signed, because after that it is a renegotiation rather than a question.

Related terms

• Pre-money vs post-money SAFE Which of the two SAFE forms you signed decides whether your other convertibles dilute the investor or dilute you.
• Fully diluted shares The share count that assumes every option and every convertible has already converted. The only number worth quoting.
• Double trigger acceleration Unvested equity vests early only if two things happen: the company is acquired and you are then let go.