Despite the market volatility roiling the tech sector right now, most founders still seem intent on raising money at unicorn ($1 billion or more) valuations, regardless of their companies’ scale. They seem to think it’s the only way to recruit and retain the best employees. But is it?

This hit home for me recently when I attended an industry event (in-person, which was refreshing after the last two years!) and ran into a close friend who runs a high-profile software company. His company’s revenue, in millions, is only in the single digits, but he told me he worried about raising a unicorn round before the VC financing party comes to an end. Otherwise it would just be too tough to poach top-notch engineers from other hot startups and, certainly, from Google or Amazon, he reasoned.

Right next to us was my business-school buddy who works as chief product officer at another software behemoth. It’s already a unicorn—with triple-digit revenue. But he worried that his own employee stock options were under water, based on public-market comps, and just ponying up the cash to exercise them—and pay the associated alternative-minimum tax—would be a huge burden. The conversation brought back memories of my pre-VC days as an entrepreneur, raising money in the early 2000s only to see my high-priced options melt down during the dot-com crash.

Twenty years later, I think the situation, while volatile, is quite different. In many ways, we’re in a golden age of software, driven by a broader digital-transformation trend that only became more pronounced during the pandemic. Scores of durable, B2B software businesses—not lightweight dot-coms—are racking up impressive amounts of recurring revenue by serving increasingly digital-savvy corporate customers with real needs in areas like big data, cloud computing, cybersecurity and more.

The problem is that even now, after the first-quarter market pullback, hordes of smaller B2B startups with little sales traction are garnering huge valuations from investors based off the standout performance of a handful of much-larger, extremely fast-growing names. Many of these larger companies are now public and have made huge returns for select investors—think Snowflake, MongoDB, Twilio, Shopify, Atlassian.

Given the outsized number of smaller, revenue-poor,  “unicorn” companies, on the other hand, it seems unlikely that most or all of them will return enough money to reward all those employees who received stock options at nosebleed valuations. And this means many tech employees may miss out on the big financial payday they’ve worked so hard for. What’s more, many overvalued unicorns may start losing talent to smarter, earlier-stage startups that haven’t yet been caught in the somewhat-inexplicable, upward valuation spiral—since those smaller companies, with their more-modest valuations, will offer more upside to new employees receiving stock options now.

The math is not hard to understand. According to Pitchbook, there are now roughly 1,000 unicorns worldwide, and almost 600 in the U.S. alone. They boast an average valuation of roughly $3.5 billion. Investors basically need all these companies to be acquired or go public at valuations of $10 billion or more to make venture-like returns—and for employees of these companies to realize their expected paydays.

Anyone want to guess how many $10B+ U.S.-based public companies we’ve minted the last decade? Only 80 (as of April 8, 2022, according to CapIQ), including 26 software companies. That’s it – only 80!

Of course, many of today’s super-unicorn B2B tech companies are valued at far more than $10 billion. I’ve written previously about this “Billion-Dollar B2B” trend and the forces that have quickly built these companies into behemoths. But even these giant companies (and it’s still a small group) can’t together create the value of hundreds of $10B+ companies, which is what we need for these 1,000 unicorns to pay out for investors and employees.

Some companies, like Instacart, have realized that getting ahead of your skis on valuation can actually hurt employee upside; these companies are pre-emptively adjusting their valuations down. But the large majority of the market still seems to be on a somewhat inexplicable, insatiable quest for unicorn valuations regardless of traction, largely in the name of employee upside.

Again, I think this is largely a fallacy. Here are three potential options/equity scenarios for startup employees in today’s environment—and some advice for tech employees AND founders/CEOs in this fast-paced, and very confusing market.

Heroic efforts for a good outcome (company A)

Let’s say Company A raises $100 million on a $1 billion valuation off of $10-15 million in annual recurring revenue (ARR). The company invests heavily in sales, marketing and customer success; it manages to get on a solid, T2D3-style revenue trajectory and achieve a $200 million run rate before growth scales down to 50%, meaning the company gets to $300 million in revenue in five years. Let’s assume that GAAP revenue mirrors ARR (even though it usually lags behind by 20-30% due to revenue-recognition timing), and the company is lucky enough to go public, disclosing GAAP figures in its prospectus. Based on the median enterprise value/revenue/growth of 0.4x, the company will be valued at 22x forward revenue, or $6.6 billion—a top-decile outcome by most measures.

In the meantime, an executive with 1% equity in the company—which can be typical for an executive in the early stages of a startup (others get far less!)—will see it dilute by 50-60% as a consequence of the three to four funding rounds the company likely raised on the path to an IPO. She’ll see another 8-10% dilution at IPO, and then 3-5% annual equity burn to account for the addition of new employee option holders along the way. At the time of IPO, that 0.5% fully diluted equity will translate to an effective valuation of $3.3 billion for the executive, or 3.3x the upside from the unicorn valuation five years ago. It will likely still be a very respectable outcome relative to the original option strike price, but a modest uptick from the unicorn round years back. And this is for a top-decile software company!

A more realistic scenario (company B)

Company B really shines out of the gate, posting impressive growth in its first year or two and raising more funding based on that. But then the company runs into some not-uncommon scaling challenges: It endures some product misfires and bad hires, and then increased competitive pressure from other, richly funded startups. Subsequently, the company’s early, top-quartile path of doubling revenue the first couple of years changes, with growth slowing to 50%. The path forward, in terms of year-end ARR, looks like $20M, $40M, $65M, $100M, and then $150M. At an EV/revenue/growth multiple of 0.4, the company goes public at a $3 billion market cap, all while the executive’s equity is likely diluted 50%, effectively making the value of her stake a mere 1.5x after five years of sweating it out. It’s OK, but not great.

The unfortunate reality for many companies (company C)

High valuations and multiple funding rounds also have given founders the opportunity to cash out millions of dollars through secondary stock sales. When the going gets tough, a founder may not want to spend five years to get a 1.5x return on her investment stake; they’ll take the money out early and go elsewhere. Investors in the meantime are protected by their liquidation preferences and cash out first in a liquidation event, leaving execs and employees at the bottom of the preference stack. This means our 1% executive may make NO return on her options at all. Furthermore, if employees have early-exercised their options, and paid AMT taxes along the way, they may actually be losing money by this point, as their exit price per share falls below the strike price of their options. Unfortunately I think we’re going to see a lot more of this situation in the future, given how many companies were hugely overvalued in the last several years.

Clearly, startup executives and employees need to be strategic about equity in this unprecedented, cash-rich startup environment. Joining a startup and being part of the founding and scaling journey was one of the most rewarding experiences of my life. But you shouldn’t mix emotions with the reality of how equity and options upside play out.

My advice: Balance the risks and rewards of joining an early-stage company with a modest valuation versus a larger, pre-IPO company. Opting for a role at the smaller, more-modestly valued company means you’ll have a low strike price on your stock options and sufficient room for upside even if the company ultimately exits for $500M to $1 billion, which is much more common for a successful, venture-backed company than a $10 billion outcome. Employee equity upside is tied to the company’s 409A valuation, which represents the fair market value of a company’s common stock and is used to determine the option strike price.  Anecdotal data shows that 409A valuations typically lag preferred valuations. But they increase to roughly 30% to 50% of the preferred price per share as the company reaches unicorn status and approaches an IPO. Furthermore, by exercising your options early using 83(b) options, which many companies offer at the early stage, you can take advantage of more-favorable tax brackets along the way.

On the other hand, joining a company at a significantly later stage, when its revenue is perhaps $75M to $100M, can be advantageous too: This company is likely to raise funding rounds in line with more-realistic, public-market multiples, and you may be rewarded with restricted stock units (RSUs) instead of stock options—more common at public companies–which can help you manage downside risk with no option strike price at play. With RSUs, the shares are simply granted after the vesting period instead of having to purchase the shares at a predetermined strike price as is customary with stock options.

Conversely, more-hyped, mid-stage companies that don’t have a lot of revenue but raise funding at levels valuing them at 100 times forward revenue may seem like a safe haven, but they may end up being a mirage. Sure, some of these companies will execute perfectly and generate respectable outcomes for their rank-and-file employees. But if you work at one of these companies, you need to be careful about dilution and purchasing high-priced options early in the cycle until the path to an IPO or strategic exit is clearer.

Finally, my advice to founders and CEOs in this market is to be long-term greedy. Sure, it feels great to raise money at unicorn valuations early in your company’s lifecycle, just like it feels great to see the value of your house double on Zillow during Covid. But that value only matters when you exit! Do not confuse the ability to raise money with the ability to spend it. Being a great steward of your capital and using it wisely to scale, acquire companies and build competitive advantage in your specific market can create value and loyalty in your employee base—and, ultimately, reward all stakeholders involved.

In the last decade alone, we have witnessed iconic founders like Elon Musk raise large mega-rounds early in the company-building cycle, but then spend those funds wisely to build defensible franchises that lifted up thousands of employees economically along the way. The reverse is also true: WeWork raised, and later burned, billions from investors on the back of a real-estate business that masqueraded as a technology company, and ultimately destroyed equity value for many employees. Let your actions and product, revenue and competitive moats create value for your employees – your pre-emptive unicorn valuation is not a substitute!

A version of this article originally appeared on Forbes.