Glossary - Overhang
In the context of venture capital and private equity, overhang refers to the situation where a company has issued options or promises for future equity to employees or service providers that have not yet been exercised. This can dilute the value of the existing shares when these options are eventually exercised. Additionally, when discussing funds, overhang can refer to the amount of committed capital that has not yet been invested by a venture capital or private equity fund.
Also known as
- Stock option overhang
- Equity overhang
- Capital overhang
Use cases examples
- Term Sheet: The company's current cap table, as attached, reflects an option pool overhang of 15%, which is to be allocated from the pre-money valuation.
- Fund Prospectus: The fund's investment overhang is approximately $200 million, representing capital commitments received but not yet deployed into new investments.
Considerations for investors
- Investors should evaluate the impact of any existing equity overhang on their investment's potential dilution.
- For fund investors, assessing the overhang can indicate the fund's investment pace and potential for future capital calls.
Considerations for founders
- Founders should carefully manage the size of the option pool to balance attracting talent with minimizing dilution to existing shareholders.
- Understanding the potential financial implications of option pool overhang on future funding rounds and valuations is crucial.
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