What is equity dilution?
Equity dilution occurs when a company issues new shares, reducing the percentage ownership of existing shareholders. When you raise investment, you create new shares for the investor. Your percentage falls even though you own the same number of shares. The goal is for dilution to be offset by an increase in the value of your remaining shares.
What is pre-money and post-money valuation?
Pre-money valuation is what the company is worth before the investment. Post-money valuation is pre-money plus the investment amount. If your company is valued at £2m pre-money and you raise £500k, the post-money valuation is £2.5m and the investor owns 20%.
What is an option pool?
An option pool is a block of shares set aside for future employees and advisers. Investors often require an option pool to be created before their investment, which means existing founders bear the dilution of creating it. A 10-15% option pool is typical for early-stage funding rounds.