The term ‘option pool shuffle’ refers to a situation in which one investor wishes for the firm to raise the size of the option pool but wishes for existing shareholders to pay for the increase by ensuring that the company’s pre-money valuation reflects the increase.
The investor wishes to ‘shuffle’ who pays for the option pool, from a post-money valuation to a pre-money valuation (in which case the investor will bear a portion of the increase, where only the existing shareholders will pay for the increase).
For instance, suppose the company’s pre-money valuation is $5 million with a 10% option pool. This suggests that the option pool has a value of $500,000. If the investor requests that the corporation extend the option pool to 20%, the option pool’s value would increase to $1 million, with existing shareholders paying for the increase through dilution of their existing stakes. This would also imply a decrease in the company’s pre-money valuation.
If an investor is seeking a 50% stake in the company, it makes no sense for that investor to be diluted soon after investing by increasing the option pool from 10% to 20%. Thus, the investor requests that the cost of the option pool expansion be’shuffled’ from the post-money to the pre-money computation. As a result, current shareholders bear the cost of the increase prior to the investor’s contribution — on a pre-money value basis.
Consider the following worked example, which assumes a $5 million pre-money value, a new investment of $5 million, and an increase in the option pool from 10% to 20%.