One of the common areas of misunderstanding, and therefore conflict, in financing negotiations has to do with the relationship between the pre-money valuation and the option pool.
Investors want the company to have an adequate option pool for future hiring and it is customary to include the pool in the pre-money valuation. Some entrepreneurs see this as nothing more than a veiled attempt at lowering the value of the company. Well, yes and no. No in that investor aren’t actually lowering the value of the company as the option pool is net new–it comes on top of what they value the company at. Yes in that investors wouldn’t be willing to do a deal at the same pre-money valuation without the option pool. Fred Wilson has a good introductory post on options and valuation, which prompted me to put together this simple valuation calculator.
First, the math, which assumes this is the first round of financing.
Post-Money Valuation = Pre-Money Valuation + Investment Amount Pre-Money Valuation = Founders' Share + Option Pool>>> READ MORE at: