Investors want to protect against dilution, they'll typically demand a larger option pool pre-financing, in order to protect against the company needing to do the same for future rounds. The reason behind this is that when you increase the option pool, it affects pre-existing shareholders and lowers their piece of the pie, but not the investor who are stipulating their percentage is based off post money valuation.
Investors will try and get you to issue more shares than needed to the option pool to try and protect their investment as much as possible.
Being armed with appropriate equity benchmarking strategies is a great way to protect yourself during these negotiations, and as a last resort, you can tell them you won't increase the pool (and lower value of pre-existing shareholders), but you will do it as needed and ensure the investors have full anti-dilution protection for their investment to keep them at an agreed upon percentage. Please reach out if there are any questions, we are happy to help here at ETB Equity.
Here is a link to a video that goes into that some more: https://etbequity.com/what-is-dilution/
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Augusto Silva
augusto@etbequity.com
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