Option pool shuffle

The option pool shuffle is a negotiating practice whereby an investor requires the creation, or the enlargement, of an ESOP (employee stock ownership plan) pool before the subscription price of the new financing round is even calculated.

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The mechanical effect of this requirement is that only existing shareholders, founders and earlier-round investors, bear the Dilution created by this enlarged pool, since it is booked before the price is set. The new investor bears none of it: the valuation actually negotiated ends up lower in practice, without the headline Pre-money valuation figure reflecting it directly.

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Concretely, on a round announced at a CHF 10,000,000 pre-money with a 5% ESOP pool enlargement booked before the price, the economic valuation actually borne by existing shareholders before the new investor arrives is in reality below CHF 9,500,000: the difference corresponds exactly to the pool created at their sole expense.

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For founders or earlier Business Angel investors negotiating a new round, spotting this mechanism in the term sheet, and isolating its real effect on their own dilution, is a central point to check before signing, and a matter that any financial structuring advisor must systematically verify.