Here’s How VC-Backed Founders Are Tricking You Into Believing That Your Stock Options Will Be Worth A LOT in the Future

Are you in a VC-backed startup? This is for You🫵🏻

Hey startup superstar! Ever felt like you’ve struck gold with your stock options? Well, let’s dig a little deeper and see if that gold is as shiny as it seems.

The Big Illusion

Picture this: you’ve just joined a promising startup that recently raised $30M at a $100M valuation. Pretty exciting, right? The founders decide to hand out stock options at this $100M valuation. Being the rockstar employee you are, you snag a 1% stock option.

Here’s where the trickery begins. The founders tell you, “Congratulations! We’re giving you $1,000,000 in stocks!” 🎉

Most people at this point would start dreaming of yachts, fancy cars, and early retirement. But hold your horses, because this couldn’t be further from the truth. 🤦‍♂️

The Reality of Stock Options

A stock option gives you the option to buy stock at a set price (the $100M valuation in our example). This means that when all your stock options vest, you’ll have the opportunity to buy them for $1,000,000. Yes, you read that right — you’re not handed $1,000,000. Instead, you’ll need to cough up $1,000,000 to own those stocks.

Making Money From Stock Options

So, how do you actually make money? You’ll only profit if the company’s valuation skyrockets well above the initial $100M. Let’s break it down:

Suppose the startup had a $5M annual recurring revenue (ARR) when it raised $30M at a $100M valuation (a 20x multiple). To see significant returns, the company would need to hit $50M in ARR and sell for $300M (a 6x multiple), without raising additional funding rounds.

Why is avoiding another round crucial? Because each new funding round dilutes your stock options, and more preferred stocks get issued.

The Harsh Reality of Reaching High Valuations

Now, what’s the likelihood of a company hitting $50M in ARR without needing more capital? Spoiler alert: it’s very, very slim. Most startups need multiple rounds of funding, leading to dilution and reducing your potential earnings.

My Advice to You

Here’s a straightforward way to gauge your stock options’ potential:

• If the value of your stock option is between 2x to 7x your ARR: Your chances of making money are high, especially if the company is profitable.
• If the value of your stock option is between 8x to 15x your ARR: Your chances of making money are low.
• If the value of your stock option is above 15x your ARR: Your chances of making money are almost zero.

Wrapping It Up

Stock options can be an exciting perk, but it’s vital to understand their true value. Don’t get swept up by the initial figures thrown at you. Assess the company’s potential growth, profitability, and likelihood of avoiding additional funding rounds.

This critical evaluation will help you make informed decisions and set realistic expectations.