Foundational Time Based Vesting and Reverse Vesting Mechanisms
Reverse time-based vesting transfers immediate share title while granting the company nominal repurchase rights that eliminate dead equity risks upon departure.
Option Pool Top Up
Meaning
Equity dilution adjustment constitutes the process by which a startup expands its employee stock incentive scheme prior to an investment round. An option pool top up ensures the founders absorb the full economic impact of creating additional unallocated shares for future hires. This prevents the new investor from suffering immediate dilution at the moment of closing.
Dilution Mechanics
Investors often demand a specific percentage of the total company capitalisation be available for employees before the transaction completes. Calculations usually assume the pool is fully unallocated, meaning all existing outstanding options plus the newly created ones count toward the total. Founders bear the entire burden of this issuance, effectively reducing their pro rata ownership stake to maintain the investor’s target entry price.
Such adjustments adjust the pre-money valuation to account for the incoming capital infusion alongside the enlarged reserve.
Economic Consequence
Capital allocation during a financing round dictates how much ownership the founding team retains after the cap table shift. An option pool top up acts as a price adjustment mechanism that shifts the cost of hiring incentives away from the investor group. When the pool size increases, the company issues more shares to the reserve, which lowers the value of existing common shares held by founders.
Parties negotiate the size of this reserve carefully because smaller pools favour founders while larger reserves provide more security for growth hires but shrink founder equity further.
Contractual Timing
Documentation of this adjustment occurs within the term sheet and the subsequent investment agreement as a condition for the deal. Closing requirements mandate the company amend its articles of incorporation to authorise the additional shares before the transfer of funds. Verification happens during legal due diligence when counsel confirms the cap table reflects the updated reservation totals as requested by the lead investor.
This procedural step creates the necessary overhead to accommodate employee equity grants without triggering immediate further dilution for the lead investor later.