Jeffrey Bussgang venture capitalist and General Partner Flybridge Capital Partners and former entrepreneur
“This relationship between option pool size and price isn’t always understood by entrepreneurs, but is well understood by VCs.” Bussgang lost a deal because the founder believed he got a better price (higher pre-money valuation) from a competing venture capitalist. However because Bussgang’s competitor required a larger option pool, the founder received less stock than under Bussgang’s offer. The founder took the competitor’s deal because he didn’t understand how the option pool calculation affected his ownership.
“[In response, Bussgang’s firm instituted a policy] to talk about the “promote” for the founding team rather than just the “pre”[-money valuation]. The “promote”  is the founding team’s ownership percentage multiplied by the post-money valuation.” The “promote” offers an “apples-to-apples” comparison of competing offers even if one offer has a lower pre-money valuation and smaller option pool. Jeffrey Bussgang, Mastering the VC Game –A VC Insider Reveals How to get from Start-up to IPO on your terms book, pg 131-133, copyright 2010