First, many thanks to MFChips for highlighting in post 85463 the recent lawsuit against Cloudflare on new stock grants to Matthew Prince and Michelle Zatlyn. This motivated me to dig into it.
The key outcome from my digging is it looks like these 2 Cloudflare founders believe they can deliver 35%+ stock price CAGR over the next 10 years.
Let me explain below how I came to this conclusion.
So what about the lawsuit?
The complaint was filed on April 6, 2022 and was voluntarily dismissed by the plaintiff after Cloudflare disclosed more details on the stock option grant to the founders.
See Form 8-K filed by Cloudflare on May 18, 2002 (https://d18rn0p25nwr6d.cloudfront.net/CIK-0001477333/2fbfaa9…).
Now, let’s take a closer look at the stock option grant.
Cloudflare filed a Form 8-K/A on April 21, 2022 with details on the grant (https://d18rn0p25nwr6d.cloudfront.net/CIK-0001477333/a72b533…).
The first thing to note is both founders will be granted options to buy 3,960,000 Class A shares (page 5 of the Form 8-K/A).
That’s about 8m Class A shares in total. With a current Class A shares outstanding of 281m (from last Form 10-Q), we’re talking less than 3% dilution.
Another thing to note is these options expire 10 year after the grant if not exercised.
Next comes the interesting part.
These options will vest in tranches based on stock price goals (page 6).
For all the options to vest and become exercisable, and therefore for the founders to get their ultimate paycheck, Cloudflare’s share price will have to reach $979. That’s roughly a 20x increase compared to today’s price ($47)!
And baselining this on the 10 year expiration for these options, this translates to a 35%+ CAGR over 10 years.
To me, this is a clear bullish sign from Cloudflare’s management. It hints they believe they can deliver 35%+ stock price CAGR over the next 10 years, which likely means the company sustaining hypergrowth for many years.
Yes, the founders will get billions of dollars if they achieve this, but I’ll be delighted to get a 20x return on my Cloudflare investment
Of course, they’ll need to execute at a business level and we’ll need to keep watching that execution like hawks.
Thanks to Saul, the assistant board managers and all the contributors who make this board so awesome, useful and life changing!