Cloudflare, 35%+ stock price CAGR over 10 years?

Investment Analysis Clubs Saul’s Investing Discussions
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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 :slight_smile:
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!

Take care,
Alaieus

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These are stock options rather than grants. The article I’d read called them grants with no mention of options, which would imply ISOs.

Big difference in general but these are definitely not grants. And with the way these are performance structured, it is, in my opinion, the ONLY way tech companies should be playing this game. That’s not going to happen because while the 2 co-founders understand the market/valuation and where they are going, the average software developer does not get this. And Cloudflares competition for talent is not structuring grants that way.

But understanding the performance structure of these options and how they vest makes me actually more confident in Cloudflare.

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Alaieus,

Thanks for bringing this up. So the options are performance based in 8 Tranches described below:


Tranche #      # of shares         Stock Price Goal      (My own) Approx. %Above current SP   
1                  198,000              $156                         230%
2                  198,000              $203                         330%
3                  396,000              $263                         460%
4                  396,000              $343                         630%
5                  396,000              $446                         850%
6                  792,000              $579                         1,130%
7                  792,000              $753                         1,500%
8                  792,000              $979                         1,980%

So 60% of these options don’t even grant until the SP is >~12.3x the current stock price. Even the lowest tranche (only 5% of the total possible options available) is a ~3.3x above the current stock price. I would say these performance options are pretty aligned with shareholder interests. The stock was at least 2x as high when these tranches were priced, but I haven’t seen anything about re-pricing them.

Bnh

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Thank you for posting this.
As we’re talking about two founders here who presumably already own a big chunk of stock, it would be interesting to calculate how much will these new grants move the needle relative to their entire net worth as key shareholders of the company. Is it merely the cherry on the cake, or are we talking about a big slice of the cake itself here?
Has anybody thought about this?
Thank you.
Silvio
(long NET)

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Never give too much importance to stock grants!
Not so long ago UPST was very popular here. At UPST, a similar news (on stock grants for Paul Gu,ounder, member of the board of directors, and a senior officer) was also felt super bullish here!

Here the SEC Form 8-K filling for Paul Gu stock grants:
https://ir.upstart.com/static-files/56ef5948-ccf9-44a1-b204-…

In the next seven years, if the stock price is below $166, he receives nothing (except for health insurance and benefits). As the stock price increases, he receives more and more shares, up to 687,000 shares if the stock price is above $616 per share in any of the reference periods.

The average of 60 days in early 2027 (for 40% of the shares), 2028 (for another 40% of the shares) and 2029 (for the rest of the shares) will be used as the share price…

With this arrangement, Mr. Gu could earn $420 million. The young man is just 30 years old…

UPST share price is under $30…he just need a 20-Bagger in next 5-6 years for the home run. Sounds super bullish!

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