Meaning
Stock reserves created for future employees prior to an investment round reduce the effective price per share for new investors. This pre-money pool ensures that the company has enough equity to attract talent without further diluting the incoming investors once the round is closed. It is a negotiation point that directly affects how much of the company the founders retain and is often the subject of intense debate during the term sheet phase.
Option Allocation
Boards determine the size of the reserve based on the projected hiring plan for the next eighteen months. Creating a large pre-money pool comes entirely out of the founders’ equity stake. If the pool is too small, the company may have to issue more shares later, which could trigger anti-dilution protections.
Valuation Impact
Investors use the size of the reserve to adjust the valuation of the business. Since the pre-money pool is included in the pre-money capitalization, it lowers the share price before the first dollar of new investment arrives. A larger pool means a lower price per share for the founders’ existing holdings.
Hiring Reserve
Granting equity to new hires is a standard way to align interests and conserve cash. The pre-money pool acts as a bank of shares that the board can draw from as they recruit executives and engineers. Once the pool is empty, the company must seek shareholder approval to authorize more shares.
