Impact of reserved shares on ownership
When a pool is created or increased pre-money, its shares are added to the company's fully diluted share count before the new investor's shares are issued. This lowers the percentage owned by every existing shareholder, including founders, without those shareholders receiving anything in return, since the pool shares are reserved for future employees rather than sold for cash, the mechanic explored further in pre-money vs post-money pool.
| Shareholder | Before pool | After 10% pool added pre-money |
|---|---|---|
| Founders | 9,000,000 shares (100%) | 9,000,000 shares (90%) |
| Option pool | 0 shares (0%) | 1,000,000 shares (10%) |
| Total | 9,000,000 shares | 10,000,000 shares |
Simultaneous round and pool dilution impact
When a pool top-up is combined with a new investment, founders are diluted twice: once by the pool and again by the new investor's shares. Because the pool is usually set as a percentage of the post-round fully diluted count, its exact size depends on how many new shares the round itself creates, which is why pool and round dilution should be modelled together, not separately, using the same worked approach as option pool dilution.
Mitigation tactics for founder ownership protection
- Size the pool to actual hiring needs rather than accepting a round-number request.
- Push for the pool increase to be calculated post-money so the new investor shares part of the dilution.
- Use unallocated shares from the existing pool before agreeing to a larger top-up.
- Model total dilution, founders plus pool plus investor, before agreeing to term sheet numbers, tracking overall founder dilution across rounds.
Dilution questions founders raise most
- Does the option pool dilute investors too?
- If the pool increase is agreed pre-money, existing shareholders bear the dilution, not the new investor. If agreed post-money, the new investor is diluted alongside existing shareholders.
- Is pool dilution avoidable?
- It cannot be avoided entirely if you plan to hire using equity, but its size can be negotiated and tied to an actual hiring plan rather than an arbitrary percentage.
- Do unallocated pool shares dilute founders even if never granted?
- Yes, in terms of fully diluted ownership. Reserved shares count toward the fully diluted total whether or not they have been granted to anyone yet.
General information for founders, not legal or tax advice. Thresholds and rates change, so confirm the current position with an adviser in the relevant country before granting.