Dilution and cap table math

The option pool shuffle

Placing a newly created option pool inside the pre-money share count means the pool is carved out of existing holders alone, not shared with the incoming investor. The headline pre-money valuation is unchanged while the effective price paid per existing share falls.

Field	Value
Formula	Effective pre-money = stated PRE * (1 - pool percentage)
Worked	Stated PRE 8,000,000 with a 15 percent pre-money pool: effective PRE = 6,800,000
Value transferred	1,200,000, from existing holders to the incoming investor

• This is not a hidden term - it appears plainly in the term sheet as the fully diluted definition. It is simply frequently not modelled.
• The negotiable variables are the size of the pool and whether it sits pre or post. Pool size should be driven by an actual hiring plan for the period to the next round, not a round number.
• A pool sized far above the hiring plan is economically identical to a lower pre-money valuation.

Fully diluted share count

The denominator used to compute ownership percentages. Which instruments are included is definitional and set by the documents, not by accounting convention.

• Commonly included: outstanding common, outstanding preferred on an as-converted basis, all granted options whether vested or not, and the unallocated option pool.
• Sometimes disputed: outstanding warrants, unconverted SAFEs and notes, and pool increases contemplated but not yet authorised.
• Every percentage in a term sheet is meaningless until the denominator is specified. Ask for the definition before modelling anything.

Also described at: NVCA model legal documents

Anti-dilution adjustment

A mechanism that adjusts the conversion price of preferred stock downward when the company subsequently issues shares at a lower price, protecting the earlier investor from the down round.

Field	Value
Full ratchet	New conversion price = the new lower issue price, regardless of how few shares are issued
Broad-based weighted average	CP2 = CP1 * (A + B) / (A + C)
A	Fully diluted shares outstanding before the new issue
B	Consideration received, divided by CP1 - the shares the money would have bought at the old price
C	Shares actually issued in the new round

• Narrow-based weighted average uses only outstanding preferred in A rather than all fully diluted shares, producing a larger adjustment for the investor.
• Full ratchet is severe: a single share issued at a low price resets the entire earlier round to that price. Broad-based weighted average is the common default.
• Anti-dilution adjusts the conversion ratio, not the share count held. The investor ends up converting into more common shares.

Also described at: NVCA model certificate of incorporation

Pool percentage - of which base?

A term sheet that says a 15 percent pool has not said what the 15 percent is measured against. Measured on the pre-round count and measured on the post-round count give different pool sizes, different prices, and a different cost to founders, on identical headline terms.

Field	Value
Formula	Pool as a fraction f of the enlarged pre-round count: pool = s_existing * f/(1 - f). Pool as a fraction g of the post-round count: pool = g * S_post, where S_post = s_existing/(1 - g - q) and q is the new investor's ownership
Setup	s_existing = 8,000,000 shares, PRE = 8,000,000, R = 2,000,000, so q = 0.20
Worked, f = 0.15 pre-round base	pool = 8,000,000 * 0.15/0.85 = 1,411,765. Price = 8,000,000/9,411,765 = 0.8500. Founder shares worth 6,800,000
Worked, g = 0.15 post-round base	S_post = 8,000,000/(1 - 0.15 - 0.20) = 12,307,692. pool = 1,846,154. Price = 2,000,000/(0.20*12,307,692) = 0.8125. Founder shares worth 6,500,000
Difference	300,000 of value on a 2,000,000 round, from one undefined word

• The post-round base is the larger pool and the lower price, because the pool has to be big enough to survive the round's own dilution. Investors asking for a percentage of the post-round capitalisation are asking for a bigger pool than the same number implies pre-round.
• The check that resolves it in one line: ask for the closing cap table with the pool as its own row and the price per share stated. Any ambiguity about the base becomes a specific share count.
• Both conventions appear in real term sheets and both are described in this corpus. On the same 8,000,000 pre-money and 2,000,000 raise, a 15 percent post-round pool produces 20.000 percent to the investor, 15.000 percent pool and 65.000 percent to founders at a 0.8125 price; a 15 percent pre-round pool produces 20.000 / 12.000 / 68.000 at a 0.8500 price. Neither is wrong - they are different terms wearing the same number.
• The pool size argument is winnable on facts - a hiring plan through to the next round produces a defensible number - while the base argument is winnable only by reading the definition. Do the second one first.

What drives a weighted-average adjustment

The weighted-average formula responds to the size of the down round as well as its price. A small issuance at a low price barely moves the conversion price; a large one at the same price moves it a great deal. Full ratchet ignores size entirely.

Field	Value
Formula	CP2 = CP1 * (A + B)/(A + C), with B = consideration received / CP1 and C = shares actually issued
Setup	CP1 = 1.0000, A = 10,000,000, new price 0.5000
Worked, raise 500,000	C = 1,000,000, B = 500,000: CP2 = 10,500,000/11,000,000 = 0.9545
Worked, raise 3,000,000	C = 6,000,000, B = 3,000,000: CP2 = 13,000,000/16,000,000 = 0.8125
Worked, raise 10,000,000	C = 20,000,000, B = 10,000,000: CP2 = 20,000,000/30,000,000 = 0.6667
Full ratchet, all three	CP2 = 0.5000 in every case

• This is the precise sense in which full ratchet is severe: the adjustment is unrelated to the harm. A 500,000 bridge at a low price resets the entire earlier round identically to a 10,000,000 recapitalisation.
• Because C appears in the denominator, the adjustment is self-limiting - a very large down round dilutes the protected holder anyway, adjustment or not. Anti-dilution protects against being repriced, not against being diluted.
• The narrow base uses only outstanding preferred in A. On the numbers above that changes CP2 from 0.8125 to 0.7000 - a 30.00 percent price reduction instead of 18.75 percent, and 16.1 percent more shares on conversion - from a single definitional choice about which shares count.

Source: NVCA model Amended and Restated Certificate of Incorporation (conversion price adjustment provisions)

Who actually pays for an anti-dilution adjustment

The adjustment shares are new shares, so they dilute everyone outside the protected class - including the investor who priced the down round. That is why a waiver or reset from the protected series is usually a closing condition rather than a courtesy.

Field	Value
Formula	New investor ownership = C/(A + C + adjustment shares) with the adjustment, and C/(A + C) with it waived
Worked, broad-based	6,000,000/16,923,077 = 35.455 percent
Worked, waived	6,000,000/16,000,000 = 37.500 percent
Cost to the new investor	2.045 percentage points, for terms it did not negotiate
Under full ratchet	6,000,000/20,000,000 = 30.000 percent, a 7.500 point cost

• Founders often assume anti-dilution is a fight between them and the earlier investor. It is usually a fight between the earlier investor and the new one, with the founder's ownership as collateral damage in both directions.
• This alignment is useful. The new investor's insistence on a waiver does more to protect the common than any founder argument, so the productive move is to let the two investors resolve it and to negotiate the pool and the preference instead.
• A partial waiver - resetting to a stated conversion price rather than the formula result - is the common landing point and is easy to model: it is just a chosen CP2.

Dilution compounds, it does not add

Ownership after a sequence of rounds is a product of retention factors, not a subtraction of percentages. Adding the round-by-round dilution figures overstates the total, and the error grows with the number of rounds.

Field	Value
Formula	Ownership after n rounds = q_0 * product of (PRE_i/POST_i). A pool refresh of fraction g_i in round i multiplies in a further (1 - g_i)
Setup	Seed 2,000,000 at PRE 8,000,000; Series A 8,000,000 at PRE 24,000,000; Series B 20,000,000 at PRE 80,000,000
Retention factors	8/10 = 0.80; 24/32 = 0.75; 80/100 = 0.80
Worked	1.00 * 0.80 * 0.75 * 0.80 = 0.4800, so founders hold 48.000 percent before any pool
With a 5 percent pool refresh each round	0.4800 * 0.95^3 = 0.4800 * 0.857375 = 41.154 percent
The additive error	20 + 25 + 20 = 65 percent of dilution added up, against 52.0 percent actual

• The product form makes the marginal cost of a round explicit: a round is a multiplier, so its cost in percentage points depends on how much is left, not on the round's own size. The fourth round of 20 percent costs less in points than the first.
• Pool refreshes are the term most often left out of a founder's own model, and three of them cost 6.8 points here on top of the priced rounds. Model each refresh as its own factor.
• The same product applies to every holder, so relative ownership between existing holders never changes through a priced round. Only new issuance moves relative positions.

Also described at: Wikipedia · Wikidata

Every disputed inclusion is a price cut

Price per share is the pre-money valuation divided by the pre-money fully diluted count. Each instrument added to that count reduces the price by exactly its share of the enlarged denominator, which converts an argument about definitions into an argument about a number.

Field	Value
Formula	Price = PRE / FD_pre. Adding shares multiplies the price by FD_before/FD_after, a reduction of 1 - FD_before/FD_after
PRE = 8,000,000 on 8,000,000 shares	1.0000
Worked, add a 1,411,765 pool	9,411,765 shares -> 0.8500, a 15.000 percent cut
Worked, also count 400,000 warrant shares	9,811,765 shares -> 0.8153, a further 4.077 percent
Worked, also count 1,000,000 SAFE conversion shares	10,811,765 shares -> 0.7399, a further 9.249 percent
Cumulative	1.0000 down to 0.7399 - a 26.007 percent reduction in the price paid for the same company

• The negotiation over whether the warrants count is a negotiation over 4.077 percent of the price. Price it before arguing it; the answer is frequently that the point is not worth the goodwill.
• Order does not matter to the final price but does matter to how the argument is framed. Ask for one fully diluted definition and one share count, then compute the price once, rather than debating instruments one at a time.
• The most commonly contested item is the unallocated pool, and it is also the largest. Anything after it is a rounding argument by comparison.

What declining a pay-to-play round actually costs

A pay-to-play provision converts a non-participating holder's preferred into common. The preference amount is extinguished and the resulting common sits behind the entire remaining preferred stack, so in any shortfall outcome the position goes to nothing.

Field	Value
Formula	Before conversion the holder receives x*I * E/T in a pari passu shortfall. After conversion it receives nothing until E exceeds the remaining stack T', so the loss is x*I * E/T for all E < T'
Setup	Series A preference 4,000,000 (the declining holder), Series B 20,000,000, new Series C 10,000,000. T = 34,000,000, pari passu
Worked, holder participates	At E = 20,000,000: A receives 4,000,000 * 20/34 = 2,352,941; B 11,764,706; C 5,882,353
Worked, holder converted to common	T' = 30,000,000 > 20,000,000, so B receives 13,333,333, C receives 6,666,667, and all common receives nothing
Cost of declining	The entire 2,352,941, plus the loss of protective provisions and anti-dilution

• The clause is written as a penalty but functions as a pricing mechanism: it sets the cost of not funding equal to the whole existing position, which is what makes an insider bridge happen when no outside price exists.
• It also concentrates the cap table exactly when the company can least afford a governance fight, because the holders who convert lose their consent rights at the same moment.
• From the holder's side, the decision is not the pro-rata cheque against the position's book value; it is the cheque against the position's value in the shortfall outcomes that triggered the round in the first place.

Also described at: NVCA model certificate of incorporation

Recapitalisation and cram-down arithmetic

A recapitalisation clears an accumulated preference overhang by converting all preferred to common and reducing the existing cap table to a stated residual percentage. The reverse split that usually accompanies it is cosmetic; the residual percentage is the whole transaction.

Field	Value
Formula	Post-recap ownership of the new money = R/(R + implied value of the residual). Setting a residual fraction v for the old cap table gives new money ownership 1 - v and an implied post-money of R/(1 - v)
Setup	20,000,000 existing shares carrying 30,000,000 of aggregate preference. New money R = 5,000,000. Residual to the old cap table v = 0.10
Mechanics	All preferred converts to common; the old 20,000,000 shares are reverse split 20:1 to 1,000,000; the new investor buys 9,000,000 shares
Worked, price and valuation	Price = 5,000,000/9,000,000 = 0.5556. Post-money = 10,000,000 * 0.5556 = 5,555,556. Pre-money = 1,000,000 * 0.5556 = 555,556
What was extinguished	30,000,000 of preference, in exchange for 555,556 of implied residual value

• The purpose is usually not to punish existing holders but to make a new management pool worth something. A pool granted behind a 30,000,000 overhang has no value at any achievable exit, so no grant retains anyone.
• The reverse split ratio is chosen for share-count tidiness and is often mistaken for the economic term. Ask for the residual percentage; the ratio follows from it.
• A new pool is normally created inside the post-recap capitalisation, so the residual is smaller than the headline v. Confirm whether v is stated before or after the pool.

Also described at: Wikipedia · Wikidata

A secondary sale is not dilution

A transfer of existing shares moves ownership between holders and leaves the fully diluted count unchanged, so no other holder's percentage moves. Only new issuance dilutes. The two are frequently conflated because both change who owns what.

Field	Value
Formula	After a transfer of s shares, FD is unchanged; the seller holds (s_seller - s)/FD and the buyer s/FD. Every other holder's percentage is identical to before
Setup	FD = 11,411,765 shares, of which founders hold 8,000,000 = 70.103 percent
Worked	A founder sells 1,000,000 shares in a secondary. Buyer holds 1,000,000/11,411,765 = 8.763 percent; founders hold 7,000,000/11,411,765 = 61.340 percent
Check	8.763 + 61.340 = 70.103 percent, unchanged. No other holder moves

• Secondary sales of common are an input to the fair market value of common, so a founder secondary can raise the strike price on every option granted afterwards. The transaction is free of dilution and not free of cost.
• A secondary priced above the last preferred round is harder to explain in a subsequent 409A analysis than a primary at the same price, because the buyer is paying that price for common rather than for preferred.
• Transfer restrictions, rights of first refusal and co-sale usually make the sale smaller than proposed. Model the co-sale cut-back before agreeing a size with the buyer.

The share ledger is the only unambiguous statement of a cap table

Percentages are derived quantities and depend on a denominator that is defined by the documents. Share counts are not. A ledger that carries every holder's share count at every stage answers every ownership, price and waterfall question without a single further assumption.

Field	Value
Formula	Ownership of holder i after round n = s_i / FD_n, where FD_n = FD_(n-1) + new pool shares + shares issued in round n. Price in round n = PRE_n / (FD_(n-1) + new pool shares)
Founder path	100.000 percent at incorporation, then 68.000, 51.000, 40.800, 32.640 percent
Retention factors	0.85000 for the pool, then 0.80000, 0.75000, 0.80000, 0.80000 for the four rounds
Check	1.00000 * 0.85000 * 0.80000 * 0.75000 * 0.80000 * 0.80000 = 0.32640, which is 32.640 percent
Total shares issued	24,509,805 fully diluted, of which 15,098,040 were sold for cash
Total cash raised	2,000,000 + 8,000,000 + 20,000,000 + 30,000,000 = 60,000,000
Blended price paid	60,000,000 / 15,098,040 = 3.9740 per preferred share

• The pool is the only line whose count never changes here, and that is what makes it fall from 12.000 percent to 5.760 percent of the company. An unrefreshed pool dilutes exactly like any other static holding, which is why a hiring plan two rounds out needs a refresh rather than an allocation.
• Because no secondary occurs, relative ownership between the pre-existing holders is unchanged by every round: each is multiplied by the same PRE/POST. All movement in relative position comes from new issuance.
• Ask for this table, not for percentages. Two people quoting different ownership figures for the same company are almost always using different denominators, and a share ledger makes the disagreement disappear in one line.
• The blended price paid across the four rounds is well below the last round price, which is the arithmetic behind an investor group's aggregate return being much better than the last round's implied multiple suggests.

Who funds an option pool refresh, and the two conventions

A refresh created inside the pre-money share count is funded by the existing holders alone and the new investor still receives exactly q. A refresh created after the round is shared by everyone including the new investor. The first is the standard convention and it changes the founders' retention factor from (1 - q) to (1 - g - q).

Field	Value
Formula	Pool inside the pre-money: S_post = s_existing/(1 - g - q), so existing holders retain (1 - g - q). Pool outside: existing holders retain (1 - q)*(1 - g)
Series A, refresh inside the pre-money	q = 25.000 percent, g = 5.000 percent: retention = 1 - 0.05 - 0.25 = 0.70000, so founders go from 68.000 to 47.600 percent
Series A, refresh outside	Retention = 0.75000 * 0.95000 = 0.71250, so founders go to 48.450 percent
Difference on one round	0.850 of a percentage point, and the new investor's ownership moves from 25.000 to 23.750 percent
Three refreshes inside the pre-money	Founders 68.000 to 47.600 to 35.700 to 26.775 percent
Same rounds, no refresh	68.000 to 51.000 to 40.800 to 32.640 percent
Total cost of the three refreshes	5.865 percentage points of the company

• The two conventions are not a matter of house style. The inside version is a price reduction: the pool shares enlarge the denominator used to set the price, so the same pre-money valuation buys the investor more shares. The outside version leaves the price alone and dilutes the investor with everyone else.
• Read the term as three separate questions: how large, measured against which base, and created inside or outside the pre-money count. A term sheet frequently answers only the first.
• Size the refresh from a hiring plan through to the next expected financing and no further. A pool sized to cover two rounds of hiring is a discount on this round's price handed over for grants that will be made at a higher strike.
• The existing corpus models a post-money refresh, where each round multiplies ownership by a further (1 - g). Both models appear in real deals and they differ by g*q per round - here 1.25 percentage points at Series A. Establish which one the closing cap table uses before reconciling to it.

Two triggering issuances give less protection than one adjustment for both

Weighted-average anti-dilution is applied to each triggering issuance in turn, using the conversion price and the share count as they stand at that moment. Because the first adjustment has already enlarged the fully diluted count, the second adjustment is computed on a larger base and moves the price less. Sequential application is therefore weaker than a single combined adjustment.

Field	Value
Formula	CP_(n+1) = CP_n * (A_n + B_n)/(A_n + C_n), with A_n the fully diluted count immediately before issuance n, B_n the consideration divided by CP_n, and C_n the shares issued
First issuance	A = 10,000,000, raise 3,000,000 at 0.5000 so C = 6,000,000 and B = 3,000,000: CP2 = 13,000,000/16,000,000 = 0.8125
Fully diluted after it	16,923,077, including 4,923,077 shares on conversion of the protected series
Second issuance	A = 16,923,077, raise 2,000,000 at 0.4000 so C = 5,000,000 and B = 2,000,000/0.8125 = 2,461,538: CP3 = 0.7184
Both at once instead	A = 10,000,000, B = 5,000,000, C = 11,000,000: CP = 15,000,000/21,000,000 = 0.7143
Cost of sequencing	0.0041 of conversion price, or 32,234 fewer shares to the protected holder
Full ratchet, either way	0.4000 and 10,000,000 shares - sequencing is irrelevant because only the last price matters

• The direction is counter-intuitive and consistently misread: more triggering events do not accumulate into more protection. Each adjustment dilutes the base that the next one is measured against, so the protection decays as it is used.
• This is the mechanism by which a series that has been repriced twice still ends up holding less than a holder who negotiated a single reset at the final price. Where a series expects a sequence of small down rounds, a stated floor price is worth more than the formula.
• The B term uses the current conversion price, not the original one, so it also shrinks with each adjustment. Both moving parts push the same way.
• Full ratchet is path-independent, which is the only respect in which it is the simpler term. It is also why a ratchet plus a small bridge is a complete reset of the earlier round: see the sensitivity entry above.

Source: NVCA model Amended and Restated Certificate of Incorporation (conversion price adjustment provisions)

What the broad base actually contains, line by line

Broad-based weighted average is named for its denominator, and the denominator is a defined term rather than an accounting concept. Each instrument included or excluded moves the adjustment by a computable amount, so the definitional argument has an exact price.

Field	Value
Formula	CP2 = CP1*(A + B)/(A + C). A is the defined capitalisation immediately before the issuance; every share added to A reduces the size of the adjustment
Typically included in A	Outstanding common; outstanding preferred on an as-converted basis; options and other rights outstanding, whether vested or not; shares reserved and available under an existing plan
Typically disputed	Warrants; shares issuable on conversion of outstanding convertible notes and SAFEs; a plan increase approved in connection with the round itself
Worked, A = 10,000,000	CP2 = 0.8125 - the base case in this corpus
Worked, adding 400,000 warrant shares	A = 10,400,000: CP2 = 0.8171, a smaller adjustment worth 0.0046 of price to the company
Worked, adding 1,000,000 SAFE conversion shares as well	A = 11,400,000: CP2 = 0.8276
Narrow base, A = 4,000,000 outstanding preferred only	CP2 = 0.7000

• Every inclusion favours the company and every exclusion favours the protected holder, in a strictly monotone way. That makes the negotiation tractable: compute CP2 under each proposed definition and compare four numbers rather than four arguments.
• The single largest item is the unallocated pool, and it is usually included without discussion. Everything after it - warrants, unconverted instruments, a contemplated increase - moves the price by fractions of a cent on these facts.
• The broad base in the anti-dilution formula is often not the same defined term as the fully diluted count used to price the round. Two definitions in one document is normal; assuming they match is the error.
• The narrow base is not a slightly narrower version of the broad base. It moves CP2 from 0.8125 to 0.7000 here, which is a 30.00 percent price cut instead of an 18.75 percent one, from a single definitional choice.

Pay-to-play with partial participation

A pay-to-play provision is usually drafted proportionally: a holder that funds part of its pro rata keeps that fraction of its preferred and converts the rest to common. The arithmetic is simple and the consequence is not, because the surviving preference is reduced while the shares are not.

Field	Value
Formula	Preferred retained = s_pref * (amount funded / pro rata requirement). Preference retained = x*I * the same fraction. Shares converted to common = s_pref * (1 - that fraction)
Setup	A holder with 4,000,000 preferred shares carrying a 4,000,000 preference and a 25.000 percent pro rata right, in a round raising 3,000,000
Pro rata requirement	0.25000 * 3,000,000 = 750,000
Funds 300,000	Fraction = 300,000/750,000 = 40.000 percent
Result	Preferred retained 1,600,000 shares carrying 1,600,000 of preference; 2,400,000 shares converted to common
Preference given up	2,400,000 of a 4,000,000 claim, for 450,000 less than the full pro rata cheque
Marginal price of preference	450,000 of cash preserved 2,400,000 of preference, a ratio of 5.33 to 1 before any consideration of the shares bought

• Partial participation is priced better than it looks in exactly the outcomes where the preference is worth something, and worse than it looks in the outcomes where the company recovers, because the converted shares participate fully in the upside either way. The decision is a view on the distribution, not on the round.
• Check whether the protective provisions and anti-dilution survive partial participation. Some drafting strips them entirely below full participation, in which case the proportional preference is the smaller half of what is being given up.
• A holder that funds nothing loses the whole preference. On these numbers that is a 4,000,000 claim surrendered to avoid a 750,000 cheque, which is why the clause works.
• Also check the denominator of the pro rata requirement. Measured on the whole round it is 750,000; measured only on the amount offered to existing holders it is smaller, and the difference decides whether a holder is in default of the clause.

A cram-down recapitalisation, worked end to end

A cram-down converts the entire preferred stack to common, reduces the old cap table to a stated residual, and creates a new pool inside the new capitalisation. The reverse split is cosmetic. The three numbers that define the transaction are the residual fraction, the new pool, and the new money.

Field	Value
Formula	Choose residual v for the old cap table and pool fraction g. Then new money takes 1 - v - g, POST = R/(1 - v - g), the old holders' implied value is v*POST, and the price is R divided by the new money's share count
Before	Fully diluted 24,509,805 shares carrying 60,000,000 of aggregate preference. New money R = 5,000,000. Residual v = 10.000 percent, new pool g = 15.000 percent
Step 1, convert	All preferred converts to common. The 60,000,000 preference is extinguished and the stack disappears
Step 2, reverse split 20 to 1	24,509,805 shares become 1,225,490
Step 3, size the new capitalisation	Old holders are to hold 10.000 percent, so total = 1,225,490/0.10000 = 12,254,900. Pool = 15.000 percent = 1,838,235. New money = 9,191,175 shares
Step 4, price it	Price = 5,000,000/9,191,175 = 0.5440. POST = 5,000,000/0.75000 = 6,666,667; PRE = 1,666,667
What was traded	60,000,000 of preference and 32.640 percent founder ownership, for 10.000 percent of a 6,666,667 company - an implied residual value of 666,667
Founders after	32.640 percent * 0.10000 = 3.264 percent, before any new grant from the 15.000 percent pool

• The reverse split ratio is chosen so the resulting share counts look tidy and carries no economic content. Anyone negotiating the ratio rather than the residual fraction is negotiating the wrong number.
• The point of the transaction is the new pool, not the new money. A pool granted behind a 60,000,000 overhang is worth nothing at any exit the company can reach, so no grant retains anyone; the recapitalisation exists to make 15.000 percent of the company worth something to the people who have to operate it.
• Confirm whether the residual is stated before or after the new pool. Ten percent before the pool and ten percent after are different transactions, and the difference here is the whole of the old holders' remaining value.
• Every step needs consents that the old holders control: a charter amendment, usually a protective provision waiver, and the conversion itself. That is why a cram-down is normally led by an existing investor rather than a new one.

ESOP burn rate and how to size the next refresh

A pool is a stock of shares being consumed at a rate. Expressing grants as a monthly burn in shares, and the remaining pool as months of runway, turns the refresh negotiation into the same kind of question as the cash runway - and it is the only sizing argument that survives contact with an investor.

Field	Value
Formula	Burn = shares granted / months elapsed. Runway = unallocated shares / burn. A refresh covering n months at the current burn, as a fraction of the post-round count, is n*burn/FD_post
Setup	Seed pool 1,411,765 shares = 12.000 percent of the 11,764,706-share ledger. 850,000 shares granted over 18 months
Burn	850,000/18 = 47,222 shares a month, or 0.4014 percent of the fully diluted count a month
Unallocated	561,765 shares = 4.775 percent of the ledger
Runway at the current burn	11.9 months
Same headcount plan at Series A scale	The plan needs 1,133,333 shares to buy the same percentage of the enlarged company, which is 7.225 percent of the post-Series A count
Refresh for 18 further months	Round the requirement up to the nearest sensible number and ask for it as a share count with the hiring plan attached, not as a percentage

• Burn measured in shares is the wrong unit for a plan, because the same hire costs a different number of shares at every valuation. Burn measured as a percentage of the fully diluted count is the stable figure and is what a refresh has to replace.
• A pool with less runway than the cash has is a real operating constraint, not a paperwork problem: the next senior hire cannot be made without either a board-approved increase or a grant that dilutes the plan's remaining candidates.
• The reverse case matters too. A pool sized far above the plan is economically identical to a lower pre-money valuation, so unspent pool at the next round is money the founders paid for and did not use.
• Grants made from an existing authorised pool need only board approval; an increase generally needs a stockholder vote and often a protective provision consent. The consent calendar, not the arithmetic, is usually what makes a refresh slow.

A tender offer at scale, and what it does and does not change

A company-facilitated tender for common shares moves ownership between holders without issuing anything, so the fully diluted count and every other holder's percentage are unchanged. What it does change is the evidence available about the value of common.

Field	Value
Formula	After a tender for s shares at price P, FD is unchanged, the seller holds (s_seller - s)/FD, the buyer holds s/FD, and every other percentage is identical. Proceeds to sellers = s*P
Setup	Post-Series B ledger, FD = 19,607,844. Founders hold 8,000,000 = 40.800 percent. The Series B price was 5.1000
Tender	2,000,000 founder shares at 4.5000 = 9,000,000 of proceeds
Discount to the last preferred price	11.765 percent
After	Founders 6,000,000 = 30.600 percent; buyer 2,000,000 = 10.200 percent; FD still 19,607,844
Check	30.600 + 10.200 = 40.800 percent. No other holder moves
Effect on option strikes	A large arm's length sale of common at 4.5000 is direct evidence of the fair market value of common and will be considered in the next 409A analysis

• A tender is the cheapest way to raise the strike price on every option granted afterwards. The transaction itself is free of dilution and not free of cost: employees hired after it pay the new price for the same upside.
• The discount to the preferred price is doing real work in the 409A analysis. A tender priced at the preferred price is much harder to reconcile with a common valuation well below it, which is one reason company-run tenders are usually priced below the last round.
• A tender is a purchase offer to a class of holders and carries securities law consequences that a one-off negotiated transfer does not. The mechanics are cheap; the process is not.
• Model the co-sale and right of first refusal cut-back before agreeing a size with the buyer. A tender is normally run by express waiver precisely because running the gates cannot deliver a fixed size.

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A pool increase at the same closing shrinks the anti-dilution adjustment

If the pool increase is authorised before the new issuance and counts in the anti-dilution base, it enlarges A and therefore reduces the adjustment the protected holder receives. If it is authorised after, it does not. The ordering of two board actions on the same day decides a conversion price.

Field	Value
Formula	CP2 = CP1*(A + B)/(A + C). Including a pool increase of s_pool in A raises CP2 by CP1*[(A + s_pool + B)/(A + s_pool + C) - (A + B)/(A + C)]
Setup	CP1 = 1.0000, A = 10,000,000, down round of 3,000,000 at 0.5000 so C = 6,000,000 and B = 3,000,000. A 1,000,000-share pool increase is approved at the same closing
Pool excluded from A	CP2 = 13,000,000/16,000,000 = 0.8125
Pool included in A	CP2 = 14,000,000/17,000,000 = 0.8235
Cost to the protected holder	65,934 fewer shares on conversion
Who benefits	The new investor and the common, in proportion to their post-round holdings. The pool increase is being used twice: once as a pool and once as anti-dilution relief

• This is not a drafting error but it is frequently an unnoticed consequence. A down round almost always comes with a new pool, so the interaction arises in nearly every case where anti-dilution is actually triggered.
• The protected holder's response is to ask that the base be measured immediately before the issuance and to define the pool increase as part of the financing rather than as a prior corporate action. One sentence, one conversion price.
• The company's response is the opposite ordering, and it is equally defensible on the drafting. Because both readings are available, this is decided by who raises it, which is a reason to compute it in advance.
• The same question arises for converting bridge notes closing alongside the down round. Whether their conversion shares sit in A moves CP2 by the same mechanism.