Option Pool Dilution Explained

Two founders own 100 percent of their startup. After one funding round with a 15 percent option pool, they own 68 percent together. Where did the other 32 points go?

This guide follows that exact example from our calculator. You will see how the pool is sized, why pre-money and post-money timing matter, and what the “option pool shuffle” does to the founders’ share.

Where an Option Pool Sits on the Cap Table

A cap table lists who owns the company’s shares and how many each holder has. The SEC describes it as a table naming the holders of a company’s equity securities. An option pool is one line on that table, reserved for people the company has not hired yet.

The pool holds shares, not cash. Each grant from it gives an employee the right to buy stock at a set price later. The IRS notes that stock options received for services can create income at grant, at exercise, or at sale, depending on the option type.

Private companies usually grant these options under a written plan. The SEC’s Rule 701 page says the rule exempts certain sales of securities made to compensate employees, consultants and advisors. A company can sell at least $1 million of securities under it, regardless of size.

Dilution is the cost of creating the pool. The SEC defines dilution as new shares that leave existing stockholders with a smaller percentage of the company. Founders keep the same share count, but the total count grows around them.

That is why a pool matters before anyone is hired. The reserved shares count in the “fully diluted” total from day one. Every percentage on the cap table is measured against that bigger number.

How Does the Calculator Size the Pool?

Our calculator adds new pool shares so the pool equals your chosen percent of the share count at that moment. The formula is pool shares = existing shares x pool % / (1 – pool %).

Here is the tool’s own default example. Two founders hold 5,000,000 shares each, for 10,000,000 in total. They raise $2,000,000 at an $8,000,000 pre-money value with a 15 percent pool, set to pre-money timing.

1. Create the pool. 10,000,000 x 0.15 / 0.85 = 1,764,706 new pool shares, so the pre-money count becomes 11,764,706.
2. Set the share price. Divide the pre-money value by that count: $8,000,000 / 11,764,706 = $0.68 per share.
3. Issue investor shares. Divide the investment by the price: $2,000,000 / $0.68 = 2,941,176 new shares.
4. Add up the total. 11,764,706 + 2,941,176 = 14,705,882 shares after the round.
5. Read each stake. Founders hold 68 percent, the investor 20 percent, and the pool 12 percent. Each founder owns 34 percent.

The post-money value is $2,000,000 + $8,000,000 = $10,000,000. Check it: 14,705,882 shares x $0.68 comes back to $10,000,000. The pool’s 1,764,706 shares are worth $1,200,000 at that price.

Notice the pool ends at 12 percent, not 15. In this pre-money mode, the 15 percent is measured before the investor’s shares arrive. The new shares then shrink it by the same factor as the founders, 0.8.

Pre-Money or Post-Money: Who Gives Up the Shares?

With a pre-money pool, the investor keeps the full stake it paid for. With a post-money pool, the investor’s stake shrinks too, and the pool reaches the full target percent.

Switch the same example to post-money timing in our calculator. The price is now $8,000,000 / 10,000,000 = $0.80 per share. The investor gets 2,500,000 shares, which is 20 percent before the pool.

The tool then adds 2,205,882 pool shares so the pool is exactly 15 percent of the final count. The investor falls to 17 percent. Founders still land at 68 percent.

Why do the founders match in rows two and three? In both modes, their stake equals (1 – pool %) x pre-money / post-money. That is 0.85 x 0.8 = 0.68. The timing only moves the cost between the investor and the pool size.

Why a 15 Percent Target Needs an 18.75 Percent Entry

A widely used industry model term sheet states the pool as a percent of the fully diluted post-money capitalization. It prices the round on a fully diluted pre-money value. Carving that post-money pool out of the pre-money side is known as the option pool shuffle.

To hit a 15 percent post-money pool while the investor keeps 20 percent, the pre-money pool must be larger. Divide the target by the pre-money share of the company: 15 / 0.8 = 18.75 percent.

Enter 18.75 percent with pre-money timing in our calculator. It creates 2,307,692 pool shares, and the price drops to $0.65. After the round, the pool is 15 percent, the investor holds 20 percent, and founders hold 65 percent.

Now compare values. The founders’ 10,000,000 shares at $0.65 are worth $6,500,000, not the $8,000,000 headline. The other $1,500,000 of pre-money value sits in the pool, which is 15 percent of the $10,000,000 post-money.

The founders’ drop from 80 to 65 percent is 15 percentage points, an 18.75 percent relative loss. Points and percent are easy to mix up here. Our guide to percentage difference versus percentage change shows why the two answers differ.

SAFEs add their own layer, because they usually convert into shares in this same priced round.

Option Pool Math Errors and Fixes

Several of these errors come from measuring the percent against the wrong total. The table pairs each error with a better habit.

Dilution is not the same as losing value. A smaller slice of a bigger company can still be worth more. To weigh an outcome in dollars, our guide on how to calculate ROI shows the return math.

Try it with your own term sheet. Enter your shares, round terms and pool size in the option pool calculator and compare both timing settings.

Option Pool Dilution: Frequently Asked Questions

Sources and Further Reading

This article explains option pool math for learning purposes and is not legal, tax or investment advice. Dollar figures come from our calculator’s default example. Reviewed for accuracy by Prof. Dr. Khalil Mudassar, PhD. Last updated September 27, 2026.