When Elon Musk woke up on Tuesday, his $204 billion net worth made him the richest person in the world by a comfortable margin of $20 billion. By the end of the day, Elon's fortune was reduced by $55 billion to $149 billion, which would drop him to the world's third richest person. And in a bizarre twist, this change didn't happen because of a significant drop in Tesla's stock price or a SpaceX rocket explosion. It happened thanks to a single ruling from a single judge in a very boring Delaware courtroom.
Before we explain what just happened in a Delaware courtroom, allow me to explain how Elon Musk's net worth is calculated:
- Elon directly owns 412 million shares of Tesla. That's around 13% of the total shares outstanding. At $191 a share, 412 million shares are worth a little under $79 billion.
- Elon indirectly owns 304 million Tesla options. At $191 a share 304 million shares are worth $58 billion.
- –> $55 billion worth of these options were given to Elon through his 2018 executive compensation package. These options are the focus of today's article.
- –> Between the shares Elon owns directly and his options, he could potentially control as much as 21% of Tesla's equity
- Elon owns 43% of SpaceX, which was valued at $180 billion at its latest funding round. These shares are worth $77 billion on paper.
- There are some other assets, like the Boring company and Neuralink, but there's also a bunch of debt taken out through loans, and Tesla shares pledged as collateral to fund his lifestyle and things like his purchase of Twitter.
$79 billion + $58 billion + $77 billion – debt/liabilities = $204 billion
Let's talk about that second bullet point. And specifically, the $55 billion worth of options he received as part of his 2018 compensation package.
2018 Compensation Package
Elon does not earn a salary as CEO of Tesla. Literally, he does not receive any paycheck in any amount from the company. Instead, Elon operates under what has proven to be the most lucrative executive compensation plan in history.
Forged in January 2018, the terms of Elon's compensation plan would reward him with options equal to 1% of the total outstanding shares every time Tesla increased in market cap by $50 billion, a maximum of 12 times, with a 10-year time limit. At the time the package was signed, Tesla's market cap was $50 billion. Think of it like this:
- If Tesla hit $100 billion in market cap, Elon got a reward.
- $150 billion – reward
- $200 billion – reward
- $250 billion – reward…
- … All the way up to $600 billion
It sounded like an insanely stupid deal to take at the time. For perspective, General Motors' market cap in January 2018 was $60 billion. Today, GM's market cap is around $48 billion. So, had Elon been the CEO of GM under this plan, he would have gotten literally zero compensation for his last six years of work. Very smart people assumed that with a little luck and hype, and probably the full decade term limit, Elon MIGHT hit the first reward tranche ($100 billion). MIGHT.
As it turns out, smart people were wrong. Very wrong, very quickly.
It took a year for Tesla to cross the first $100 billion level. Two years later, in December 2020, Tesla's market cap crossed the maximum $600 billion level. FYI, one year later it topped out at $1.23 trillion. At that level, Elon's net worth hit $340 billion. That made him the richest human in modern history, breaking an 80-year record held by John D. Rockefeller.
Shareholder Lawsuit
Considering he literally 20X'd Tesla's market cap (at its all-time high), you might assume every single shareholder along for that ride would be nothing be extremely happy and grateful for Elon Musk and the comp plan. But that's not the case. Some shareholders actually filed a lawsuit claiming:
- a) It was overly excessive.
and
- b) Musk and the board of directors had conflicts of interest.
Tesla, like most American corporations, is legally located in Delaware. So, the lawsuit was heard and decided by Delaware Chancery Court Chief Judge Kathleen St. J. McCormick. Today, Judge McCormick sided with the shareholders. In her ruling, she VOIDED Elon's entire 2018 comp package. She also found that Elon drove the "deeply flawed" process, which was overseen by people he "controlled." 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?"
The judge furthermore pointed to several potential conflicts of interest the board members and advisors may have had. For example, the company's general counsel is Musk's former divorce attorney. One of the board members, Kimbal Musk, is Elon's brother.
(Photo by Drew Angerer/Getty Images)
What Happens Now?
Elon can (and will) appeal the ruling. If he loses that appeal, the board needs to basically start from scratch and come up with a new compensation plan for his performance since 2018. A compensation plan that will be highly scrutinized. And what should that number be? Even if it was reduced by 90% to $5 billion, one could argue that would still be an exceptionally generous compensation package for a public company CEO over a six-year period. That would work out to $833 million per year in compensation. Even in the echelons of the highest-paid and richest people in the world, who could argue that being paid $833 million a year is NOT a fair reward for running a company very, very, very successfully?
Elon Really Really Hates This Court
So this one Delaware court just cost him $55 billion. But that's not all they've done. This is the same court that 15 months ago forced him to go through with his $44 billion purchase of Twitter at what has proven to be an extremely over-valued price. So, in the last 15 months, this one court has essentially cost Elon $99 billion. No wonder he just tweeted the following:
Never incorporate your company in the state of Delaware
— Elon Musk (@elonmusk) January 30, 2024
