The majority of Elon Musk’s net worth comes from his stake in the publicly-traded electric car company Tesla. By our calculation, out of his current $175 billion net worth, roughly $111 billion is attributable to his shares in Tesla. I’ll explain the math behind that $111 billion calculation in a moment because it’s actually very pertinent to this article. Elon’s stake in the privately-held SpaceX is worth around $77 billion. He owns some other assets, but he also has A TON of debt, thanks largely to his terribly-timed $44 billion acquisition of Twitter. When you put it all together ($111 + $77… minus a bunch of debt, plus some other assets…), you get $175 billion. Tesla’s stock price is down 40% since January 1. That drop has shaved $55 billion from Elon’s net worth and dropped him from being the #1 richest person in the world to the current #4 richest person in the world (behind Mark Zuckerberg, Jef Bezos and Bernard Arnault, in that order).
Let’s look more closely at Elon’s $111 billion stake in Tesla. His Tesla shares can be separated into two buckets: 1) Shares he directly owns right now free and clear, and 2) Options he was awarded after dramatically increasing Tesla’s market cap. This second bucket is what we are focusing on today.
Back in January, a Delaware judge sided with a shareholder who sued Tesla and Musk over these options. At the time, the options were worth around $56 billion. In her ruling, the judge VOIDED those options, effectively DELETING $56 billion from Elon’s net worth. And now Elon is asking Tesla shareholders to officially un-delete his options.
(Photo by Jesse Grant/The Hollywood Reporter via Getty Images)
2018 Compensation Package
Long story short, Elon Musk does not earn a salary as CEO of Tesla. Back in 2018, he agreed to forgo all standard forms of compensation in exchange for a highly unusual incentive-based pay package that would give him an additional 1% stake in the company (up to 12%) every time Tesla’s market cap increased by $50 billion under his watch. At the time the deal was signed, Tesla’s market cap was $50 billion. If Elon increased Tesla’s market cap above $600 billion – the highest level – he would have unlocked 12 goals and received 12% of the company’s outstanding shares.
Most people thought this plan was nuts. At most, MAAAYYYBE Elon would unlock the lowest-level goal of getting Tesla to go from $50 billion to $100 billion. For perspective, at the time of the deal, General Motors’ market cap was $60 billion.
As it turned out, it only took Elon two years to grow Tesla from a $50 billion company to a $600 billion company. And a year after that, Tesla’s market cap hit $1.23 trillion. And during that period when Tesla was trading above $600 billion, Tesla’s board of directors officially approved and rewarded Elon with 12% of the company in the form of options. When they approved the payment, the options were worth $100 billion.
Shareholder Lawsuit
You might assume that every single Tesla shareholder who owned the stock in the period when the company grew from $50 billion to $1 trillion+ would be nothing short of ecstatically in love with Elon Musk and the Tesla board for forging this compensation package. And for the most part, that’s true. But there was at least one shareholder who, for some reason, was unhappy. Unhappy enough to file a lawsuit, in which he claimed the 2018 deal was both egregiously generous and pushed through by a board of directors made up of Elon’s buddies and relatives who did whatever he told them to do.
The lawsuit went ahead, and incredibly, in January of this year, a Delaware judge sided with the shareholder! As a Delaware-based company, the judge was within her power in her ruling to VOID the deal altogether. From her ruling:
“In the final analysis, Musk launched a self-driving process, recalibrating the speed and direction along the way as he saw fit. The process arrived at an unfair price… The most striking omission from the process is the absence of any evidence of adversarial negotiations between the Board and Musk concerning the size of the grant…
Swept up by the rhetoric of ‘all upside,’ or perhaps starry eyed by Musk’s superstar appeal, the board never asked the $55.8 billion question: Was the plan even necessary for Tesla to retain Musk and achieve its goals?“
Fast forward to the present.
We have not removed these options from Elon’s net worth calculation for two reasons!:
- #1) He can (and will) appeal the ruling
- #2) He can ask Tesla shareholders to vote to reinstate the payment.
On Wednesday, Tesla made a filing with the SEC, which stated it plans to ask its shareholders to approve two proposals in an upcoming vote:
- #1) To reinstate Elon’s $56 billion pay package
- #2) To reincorporate Tesla in Texas, moving it away from the punishing judgment of Delaware courts
I have no idea how this vote will turn out. On the pay package question, I will say that Elon isn’t quite the superstar he was between 2018 and 2022. As we stated previously, the stock has dropped 40% since the beginning of the year and Tesla’s market cap is actually back down under $500 billion today. If you were a Tesla shareholder, would you want to give Elon $56 billion? Wouldn’t $10 billion be an equally incredible reward by any objective measure? If so, that would give the company $46 billion to invest in new products or return to shareholders. On the other hand, if you spurn Elon, does he leave the company altogether to focus 100% of his efforts on SpaceX? And if that happened what would happen to Tesla’s stock price?
If shareholders do vote NO on the pay package question, at today’s levels, Elon’s net worth would sink to around $125 billion overnight. That would drop him to the 11th richest person in the world, right behind Sergey Brin. In addition to co-founding Google, Sergey was a very early Tesla investor. He was also formerly married to Nicole Shanahan who Elon allegedly had an affair with and is now Robert Kennedy Jr.’s running mate.
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