Meaning
Structural adjustments modify the size and terms of an employee incentive reserve during a primary investment round. A stock option pool conversion typically occurs to satisfy the requirements of incoming venture capitalists who demand a specific percentage of the post money cap table be set aside for talent. This process requires a mathematical recalculation of the available shares to account for the new valuation.
It ensures that the promise of future equity remains funded without needing immediate board approval for every new hire.
Reservation Adjustment
Formulas used during a funding round determine how many new shares are added to the employee pool. This adjustment happens before the new capital arrives to ensure that the dilution burden falls on the existing shareholders. The board must approve the new total to maintain compliance with the corporate charter.
Dilution Burden
Original owners see their percentage decrease as the incentive reserve expands. This expansion is often a condition of the investment and must be balanced against the need to attract high quality employees. The records must show the impact of the new pool on the fully diluted share count.
Allocation Rule
Management of the pool requires a clear set of rules for how many shares each role receives. The conversion process establishes the total capacity for these grants. It provides a budget for equity compensation over the next phase of growth.
