Pre-money, post-money, and the option pool that changes the real price.

The arithmetic, in full

A priced round has exactly four numbers in it, and three of them are derived. Someone states a pre-money valuation and an amount to be raised. Post-money is the sum. Ownership is the raise divided by the post-money. Price per share is the pre-money divided by the pre-money fully diluted share count. That is the whole model.

Price per share is where the pool hides

The pre-money valuation is a total, not a price. To turn it into a price the parties divide it by a share count, and that share count is a negotiated definition rather than a fact. The usual convention is fully diluted: issued common, issued preferred as converted, all outstanding options, and the unallocated option pool. Each of those inclusions lowers the price per share and therefore raises the number of shares the new money buys.

The consequential one is the option pool. Investors routinely require the company to have a stated unallocated pool after closing — enough to hire the next two years of employees — and routinely require it to be created before the round, which puts it in the pre-money denominator. The pool is then paid for entirely by the existing holders.

Take a company with 7,000,000 founder shares raising $1,000,000 at a $4,000,000 pre-money valuation. Three versions of the same headline deal:

The founders lose ten points of the company between row one and row two, and the price per share falls 12.5%, from $0.5714 to $0.5000. There is a simple way to state what happened: the effective pre-money valuation is the stated pre-money minus the pool percentage times the post-money. Here that is $4,000,000 − (10% × $5,000,000) = $3,500,000, which is exactly what the founders' 7,000,000 shares are worth at $0.50.

Reading a round's true dilution

Dilution is multiplicative. Each round leaves an existing holder with the fraction of the company that was not sold, applied to whatever they held before. Selling 20% leaves you with 80% of what you had, not 20 percentage points less.

Two things fall out of this table. The first is that the pool top-ups matter as much as the rounds: three 5% top-ups cost the founders more than six points. The second is that the arithmetic is not a reason to raise less. A founder with 29.5% of a company worth $400,000,000 is better off than one with 70% of a company worth $20,000,000. What the arithmetic is good for is noticing when a round is expensive relative to what it buys.

Where SAFEs fit

The pre-money and post-money distinction shows up again in convertible instruments, in a related but not identical sense. A post-money SAFE valuation cap fixes the investor's percentage of the capitalization immediately before the priced round, so the arithmetic runs the same direction: the percentage is stated, and the share count is solved for. A pre-money cap fixes a price instead, and the percentage falls out afterwards.

One trap is worth flagging. A "post-money" SAFE cap is post all SAFEs but pre the priced round, so a 10% post-money SAFE holder does not own 10% after the Series A closes — they are diluted by the new money and by the pool increase created for it, exactly like everyone else. The full mechanics, with a worked conversion, are at /equity/safe-note; convertible notes behave the same way once the interest has been added, as set out at /equity/convertible-note.

Common mistakes

• Quoting a post-money number as a pre-money one in a pitch, then discovering at term sheet stage that the round costs several points more than planned.
• Computing price per share off issued shares rather than fully diluted shares, which produces a price the investor will not accept and a cap table that does not reconcile.
• Agreeing a pool percentage before writing a hiring plan. Ten percent is a convention, not a calculation.
• Forgetting that outstanding SAFEs and notes convert into the pre-money share count, which lowers the price per share for the new investor and dilutes the founders further.
• Treating a round valuation as the fair market value of common stock. They are different numbers determined by different processes — see /equity/409a-valuation.
• Reporting dilution additively across rounds. Four 20% rounds do not sell 80% of the company; they leave the original holders with 41% of what they had.