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Elon Musk’s Mega Grant

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March 29, 2018 | Barbara Baksa

Elon Musk’s Mega Grant

Last week, Tesla shareholders approved a massive 10-year performance-based stock option grant to Elon Musk. Here are a few interesting tidbits about it (as described in Tesla's proxy statement).

A Lot of Stock

The option grant gives Musk the right to purchase over 20 million shares if certain performance goals are met in the next ten years. Each of the 12 vesting tranches is equivalent to 1% of Tesla’s currently outstanding stock. Musk currently owns close to 21% of the outstanding stock.

As of yesterday's close, Tesla’s stock price had declined by almost $100 per share since the option was granted, so the option is already underwater.

Market Cap

Vesting in the option is tied to achievement of 12 market cap thresholds. This is a fairly uncommon practice; so uncommon that we don’t track this as a possible metric in the NASPP/Deloitte Consulting LLP Stock Plan Design Survey—companies that use market cap are lumped in with the 3% of companies in the "other value-based metric" category.

Why market cap and not TSR or a stock price target? That is a good question; I don’t have an answer for it—if you have any thoughts, let me know. If you are wondering, market cap is considered a market condition.

Matching Operational Metrics and Other Conditions

In addition to achieving the market cap thresholds, vesting is also tied to operational metrics. For each tranche to vest, Tesla must achieve one of the market cap thresholds AND one of 16 possible revenue and adjusted EBITDA targets. How is EBITDA adjusted? By backing out stock compensation expense, of course. An option for 20 million shares is expensive.

In addition to the operational metrics, vesting is contingent on Musk continuing to serve as CEO, executive chair, or chief product officer. And the option is subject to a five-year post-vesting holding period. Any portion of the option not earned in ten years will be forfeited.

Special Shareholders Meeting

Tesla had only 8.5 million shares available for grant under its stock plans, so the company had to call a special shareholders meeting to approve the award. I wish I owned a share of Tesla stock—the meeting was held at their Fremont facility, which is only 10 minutes from my house. I could have gone, maybe given a little speech about the dangers of mega grants and people who don't need any more money (just kidding, I don't think they let people give speeches like that at shareholder meetings).

Tesla shareholders approved the award by a wide margin (even without Musk's votes), despite negative recommendations from ISS and Glass Lewis ("Proxy Advisors Slam $2.6 Billion Musk Package as Investors Shrug," Bloomberg), proving that it is possible to get a favorable vote without support from the major proxy advisors.

Not the First Time

This isn’t the first time Tesla has granted an award like this. In August 2012, the board approved a option to purchase over 5 million shares (valued at $78 million) to Musk. That option vested upon achievement of a similar combination of market cap targets and operational milestones and is now almost fully vested. The underlying stock is currently (as of yesterday’s close) worth over $1.3 billion.

And that is the problem with mega grants: once you grant them, you have to keep granting them and they keep getting bigger.

- Barbara

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