The word “optionality” comes up a lot these days, and you may wonder what exactly it means. In the context of business building, optionality is creating a company where you have lots of different avenues for reaching your goal(s).
Having optionality is the opposite of putting all of your eggs in one basket and is a common vein that runs through all of the value drivers we measure over at The Value Builder System™.
In the early days of your business, optionality may be about having lots of marketing channels that you can dial up or down depending on which is working when.
As you start to consider your next life chapter, optionality is about creating negotiating leverage over potential investors and acquirers.
How Josh Delaney Earned Optionality for Himself
Josh Delaney started FABCBD, a CBD oil e-tailer in 2017. By 2020, through a combination of savvy marketing and good fortune, FABCBD had risen to more than $10 million in annual sales.
One of the secrets to his success was having a diversified set of marketing channels. Delaney optimized his website for ranking on key search terms, built an in-house email list, bought paid ads, and partnered with affiliates to promote his CBD products.
His affiliate marketing was particularly successful, driving 30-40% of his sales. Delaney cultivated a portfolio of affiliates to ensure he was never too reliant on one influencer.
As he grew FABCBD, he never got too sentimental about his business. As he told me when I interviewed him on Built to Sell Radio, he believes too many founders get overly romantic about their business and become emotionally attached. When your company becomes part of your soul, it is hard to sell or raise money, which were both options Delaney wanted to keep open.
When it came time to sell, Delaney continued his obsession with optionality by attracting seven Letters of Intent. Each formal offer had a different set of terms, giving him options for how much of his proceeds he would receive up front versus how much he was willing to accept tied to future performance.
In the end, he agreed to be acquired by High Tide, a Calgary-based cannabis company that offered him $13 million in cash plus $8 million in High Tide shares in return for 80% of FABCBD (an implied valuation of $25.8 million).
Here again, Delaney focused on ensuring he had optionality. He negotiated a schedule whereby he was allowed to sell his High Tide stock at specific points in time, starting four months after the deal closed. As it turns out, he hasn’t sold any of the stock because he believes in the long-term prospects for High Tide, but he has the option to.
Delaney even negotiated a put option on the 20% of his shares he chose to keep in FABCBD. After a 12-month holding period, Delaney has the right to force High Tide to buy his remaining shares at a value of six times trailing twelve months EBITDA. Based on the success of FABCBD, he’s unlikely to trigger his put—but he has the option to.
At every turn, Delaney focused on having optionality, which should be the ultimate aspiration of just about any founder.