Once upon a time, unicorns were a rare thing. In fact the use of the term ‘unicorn’ in the startup World was meant to convey that rarity. Only a precious few startups get to $1B+ in valuation.
While this is true in relative terms, the absolute number of unicorn startups has never been higher. And the timeframe from inception to unicorn status is compressing. The poster child of this trend is Slack. In the last year it has gone from a $67M valuation to a $2.6B valuation.
When I talk to founders these days, especially in the Valley, they tell me that they struggle to compete with these unicorns for talent. Everyone wants to work for them. And of course they have so much money that they can pay more than other merely mortal startups.
Why do people join startups? There are many factors: interesting work and getting to work with smart people usually top the list. Good salaries come next. But the potential to have ownership in a company and share in the rewards of the value you help create has always been an important component. And when I look at these valuation trends I can’t help think that regular employees are not going to see much from their options when all is said and done.
How many millionaires have Facebook, Paypal, Google and others created? Those millionaires have started companies, become VCs, angel investors and contributed towards the next generation. They are an important part of the puzzle.
If you own options in a company that has raised far more capital that it needs at a valuation that it has yet to grow into, then your options are under water. Even after the 409A valuation discount. Moreover, many startups do unnatural things to get their unicorn status. They agree to unclean terms such as multiple liquidation preferences in order to artificially bump up valuation. This only puts you even further back in the bus when it comes to sharing the spoils come exit time.
The founders of these unicorns are taken care off. They’re selling shares in secondary transactions earlier and earlier. I don’t fault them for that at all. The chances of achieving a multi-billion $ outcome are very small. If you’re going to go for that, you should de-risk yourself.
So, the founders are protected and the VCs are protected. Employees are not. Think about that when you’re choosing what company to join. Do you stand a reasonable chance of seeing any return from your options? That should be an important part of your decision.