Musk is campaigning for more stock grants. And in the wake of the Tornetta decision, his biggest fans are demanding that the Tesla board restore what was lost. Here's why I don't believe it can happen
As always, a spectacular effort Mr Fossi! Separately, I just turned down an opportunity to invest, pre-IPO, in xAI as I too have concerns about how Musk is holding Tesla shareholders and the Board hostage. So we are left to wonder if/when the loyal shareholders of TSLA ever become frustrated with the perceived(or actual) damage Musk has inflicted upon what has become a success story* at Tesla. This behavior remains foreign to me after a few decades of working for Boards that take their governance responsibility seriously.
*I've learned we don't have to agree with how those loyal to Tesla view success but sometimes I find myself marveling at what he has built against big hurdles. And then Musk again delivers the behavior that defies common decency.
I am curious about the accounting treatment for both the cancelled options and any future options in a revised bonus scheme.
For accounting purposes, employee stock options are normally valued at the time of award because that's when the risk associated with the stock price transfers from the company to the employee.
In the case of the cancelled options, Tesla has already accounted for about $2 billion in stock compensation expense. If the court decision is upheld, presumably Tesla would book a $2 billion credit to earnings and GAAP profit would increase by $2 billion. But the real credit is $48 billion since Musk, not the company carried the risk and reward for the share price between award and cancellation.
Going forward, any new compensation plan would be valued at the current value of the awarded options. The value of a 10 year option with strike price of $187, a current share price of $170 would be about $111. In a plan that awarded 1% of the company for each tranche, each tranche would be 30 million shares, and would be valued at $3.3 billion.
It would be hard to put together any plan with reasonably achievable milestones, and the kind of reward that Musk is likely to want, that does not completely wipe out Tesla's GAAP profits if the milestones are achieved.
I see the problem you describe as "the temptation to go too far afield arises with any essay about Elon Musk".
Still, because it closely pertains: Has there been any news about one of his other threats, namely taking Tesla's incorporation from Delaware to Texas? And would it have any effect on your reasoning above?
I think the current talk is about reincorporating in Nevada. Such a move by Tesla would have no effect on the Tornetta decision. But, would it result in a more lax standard for judging a future compensation package? I doubt it. I doubt the independent directors at Tesla will grant any substitute package. And, were that to happen, and were Nevada's Supreme Court to make decisions allowing Musk to run amok, institutional investors would flee. That's why you don't see any move among public companies to reincorporate outside of Delaware. The integrity and expertise of the Delaware courts is the assurance that corporate governance will be kept in bounds.
As always, a spectacular effort Mr Fossi! Separately, I just turned down an opportunity to invest, pre-IPO, in xAI as I too have concerns about how Musk is holding Tesla shareholders and the Board hostage. So we are left to wonder if/when the loyal shareholders of TSLA ever become frustrated with the perceived(or actual) damage Musk has inflicted upon what has become a success story* at Tesla. This behavior remains foreign to me after a few decades of working for Boards that take their governance responsibility seriously.
*I've learned we don't have to agree with how those loyal to Tesla view success but sometimes I find myself marveling at what he has built against big hurdles. And then Musk again delivers the behavior that defies common decency.
Thanks for writing this!
Quick question:
III A. "Was the plan even necessary for Tesla to retain Musk and achieve its goals?"
Does this matter? Is the company bound to an upper limit of what is "necessary to retain" to CEO? Can they pay more?
I am curious about the accounting treatment for both the cancelled options and any future options in a revised bonus scheme.
For accounting purposes, employee stock options are normally valued at the time of award because that's when the risk associated with the stock price transfers from the company to the employee.
In the case of the cancelled options, Tesla has already accounted for about $2 billion in stock compensation expense. If the court decision is upheld, presumably Tesla would book a $2 billion credit to earnings and GAAP profit would increase by $2 billion. But the real credit is $48 billion since Musk, not the company carried the risk and reward for the share price between award and cancellation.
Going forward, any new compensation plan would be valued at the current value of the awarded options. The value of a 10 year option with strike price of $187, a current share price of $170 would be about $111. In a plan that awarded 1% of the company for each tranche, each tranche would be 30 million shares, and would be valued at $3.3 billion.
It would be hard to put together any plan with reasonably achievable milestones, and the kind of reward that Musk is likely to want, that does not completely wipe out Tesla's GAAP profits if the milestones are achieved.
I almost never log into Xitter, but was glad I did to see you launched a substack!
Thanks, Nick. Much appreciated.
I see the problem you describe as "the temptation to go too far afield arises with any essay about Elon Musk".
Still, because it closely pertains: Has there been any news about one of his other threats, namely taking Tesla's incorporation from Delaware to Texas? And would it have any effect on your reasoning above?
Thanks for the essay, and thanks for an answer.
I think the current talk is about reincorporating in Nevada. Such a move by Tesla would have no effect on the Tornetta decision. But, would it result in a more lax standard for judging a future compensation package? I doubt it. I doubt the independent directors at Tesla will grant any substitute package. And, were that to happen, and were Nevada's Supreme Court to make decisions allowing Musk to run amok, institutional investors would flee. That's why you don't see any move among public companies to reincorporate outside of Delaware. The integrity and expertise of the Delaware courts is the assurance that corporate governance will be kept in bounds.