Pre-money, post-money, and the option pool shuffle
Three terms decide what a round costs you in ownership, and the option pool is the one nobody negotiates. How to model dilution properly before you sign.
Ask a founder what they gave up in their last round and you will usually get the investor's number: "we sold 23%." That figure is normally correct and almost always incomplete.
Three terms decide what a round actually costs you. Two of them get negotiated hard. The third gets waved through as a formality, and it is frequently the most expensive line on the page.
Post-money is the denominator
The arithmetic is simple once you know which number sits on the bottom.
Investor ownership = raise ÷ (pre-money valuation + raise)
Raise $3,000,000 on a $10,000,000 pre-money and the investor owns 3 ÷ 13, or 23.1%. Not 30%, which is what you get if you divide by the pre-money instead — and that mistake, in that direction, is why some founders are pleasantly surprised and others feel misled.
The word to listen for is which valuation is being quoted. "A $13 million valuation" and "a $13 million pre-money" describe two different deals, and the gap between them is roughly three points of your company.
The option pool shuffle
Here is the term that does the quiet damage.
Investors will normally require an option pool sized to cover hiring through the next 18 to 24 months — commonly another 5% to 10% of the company. The question that matters is not how big it is. It is whether it is carved out before or after the money goes in.
Standard practice is to create it pre-money. That means it comes out of the existing cap table, and the new investor's percentage is calculated after it exists. In plain terms: you are funding the pool that will hire the people who work for the company the investor just bought into, and the investor's stake is untouched by it.
This is not sharp practice — it is the market convention, and every investor will expect it. But it is a negotiable number that behaves exactly like a reduction in your valuation, and it is almost never argued about with the same energy as the headline figure. A 10% pre-money pool on a $10 million pre-money is, in effect, a $1 million haircut wearing different clothes.
If you are going to push on one thing after the valuation, push on pool size, and bring a hiring plan that justifies a smaller number.
Putting it together
Take a company with founders at 75%, existing investors at 13%, and an option pool of 12%. It raises $3,000,000 on a $10,000,000 pre-money, with a new 5% pool created at close.
The pool goes in first, diluting everyone already on the register by 5%. Founders drop from 75% to 71.3%. Then the new investor takes 23.1% of the post-money company, and everyone else is scaled down again.
Founders land at 54.8%.
Now the useful comparison. Without the new pool, the same round on the same terms would have left founders at 57.7%. So the pool cost them 2.9 points of the company — more than a tenth of what the round cost them in total, from the one term that arrived as boilerplate.
That is the whole argument for modeling a round rather than reading it. The mechanics are not complicated, but they compound in an order that is easy to get wrong in your head.
Is the number market-rate?
Dilution only tells you what you paid. Whether you paid too much is a separate question, and the fastest sanity check is the multiple your pre-money implies against current revenue.
On $1,200,000 of annual recurring revenue, a $10,000,000 pre-money is about 8.3x. For a company growing 50% or more year over year with clean unit economics, that is defensible. For one growing 20%, it is a number you will have to grow into before the next round, and a flat or down round two years out costs far more than a lower valuation now.
Below roughly 3x, ask why. Sometimes the answer is the market. Often it is that the books could not support a stronger case — which is a fixable problem you have run out of time to fix.
What the raise buys, in months
Founders raise dollars and spend months. Convert the round before you sign it.
$200,000 of existing cash plus $3,000,000 at an $85,000 monthly net burn is 37 months on today's spending. But nobody raises $3 million to keep spending $85,000 a month — the plan is to spend faster, and the real runway is whatever the post-raise burn gives you.
Two rules worth holding to:
- Raise for a milestone, not a duration. "Eighteen months of runway" is not a plan. "Enough to reach $4 million of ARR with the second sales pod hired" is, and it tells you when you are off track.
- Assume the next round takes six months longer than you think. Money that funds the milestone exactly funds nothing, because you will be raising again from a position of need. Build the weekly view against the post-raise burn and find the month the process has to start.
Before you sign
- Confirm which valuation is quoted — pre-money or post-money — in writing.
- Model the pool at the proposed size, then at half of it. The difference is what the conversation is worth.
- Check what else dilutes. Outstanding SAFEs and convertible notes convert at this round, usually at a discount or a cap, and they come out of your side of the table.
- Read the liquidation preference. A 1x non-participating preference on a clean round is standard; anything above it changes what your remaining percentage is actually worth at exit.
- Work out the post-raise burn and the month you have to be raising again.
Model it first
The raise and dilution modeler takes your current ownership, the raise, the pre-money and the proposed pool, and returns the post-round cap table alongside the implied revenue multiple. It carves the pool pre-money, which is what will actually happen, and it takes about three minutes.
Run it twice — once at the terms you have been offered, once at the terms you would ask for. The gap between those two versions is your negotiating position, stated in the only unit that matters afterward.
