Startup Investments as Options

I often encounter some people who don’t understand what is the actual startup investments, and I’ve personally met founders who treat them more poorly than we can imagine.

This eventually leads startups to the ‘death valley,’ even when they have enough potential to progress.

Investments in startups are actually similar to options in the trading world. Options are simply buying the right to do something in the near future in exchange for money. It sounds like a form of insurance.

We need to think of our startup investments as options. It’s crucial to understand that the investment is subject to time decay. This means there’s no alternative; the value will dramatically decrease and eventually become zero, which is ‘out of the money’ in options terminology.

To explain more straightforwardly: if we get $1M and spend $100K per month, our startup valuation will decrease every month. At this burn rate, the investment would reach zero in 10 months if no additional value is created. Sometimes market trends can make valuations skyrocket, but the actual timeline is primarily a matter of your burn rate.

If you can’t create something positive today, tomorrow your value becomes smaller. Here’s a catch: people can disguise this well and act like everything is fine until the last minute.

But that’s not what we should do. See when your ‘options’ will expire. Once you know that, you already know how to manage it.

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