I am reading Venture Deals 4th edition and I came across the following statement in a chapter on economic terms of the deal:
Consider $5 million investment at $20 million pre-money valuation. Assume that you have an existing option pool that has options representing 10% of the outstanding stock reserved and unissued. The VCs suggest that they want to see a 20% option pool. In this case, the extra 10% will come out of the pre-money valuation, resulting in an effective pre-money valuation of $18 million.
I don't understand how expanding option pool prior to investing round will reduce the pre-money valuation from 20 to 18. Can someone help me with the math?