Tornetta v. Musk et al,

Musk's Stock Ownership and Pay Compared to Other Founder CEOs

  1.   Comparator Companies
  1.   Stock Ownership Compared
  1.   Pay Compared

a)  Musk Option Compared to Equity Awards to Other Founder CEOs

The value of the Musk Option, $2.6 billion, was estimated by Tesla, as noted in the May 1 column, using a so-called Monte Carlo option-pricing model (an alternative to Black Scholes).

The median of the total values of equity awards over the last five fiscal years provided by the 10 comparator companies to their Founder CEOs was approximately $32.6 million (based on grant-date values as reported in proxy statements). The value of the Musk Option is approximately 80 times the median just noted. Significantly, four of the 10 comparator companies did not make equity grants to their Founder CEOs during their last five fiscal years (Alphabet, Amazon, Facebook and Garmin).

Special Note regarding Tesla's Prior Option Grants to Musk: In August 2012, Tesla awarded Musk a stock option to acquire 5 percent of Tesla shares then outstanding. Like the current Musk Option, the 2012 option grant has significant market cap and operating performance hurdles. Prior to that, in December 2009, Tesla awarded Musk a stock option to acquire 8 percent of Tesla shares then outstanding. Fifty percent of the option was subject to performance-vesting, 37.5 percent of the option was subject to time-vesting (over a three-year period), and 12.5 percent of it was fully vested upon grant.

b)  Salary and Annual Bonuses: Musk Compared to other Founder CEOs

During the five-year period ending Dec. 31, 2017, Musk received no salary or annual bonus. (Tesla's proxy statements indicate that Musk was provided an annual salary in the range of $33,000 to $50,000 during that five-year period—apparently to comply with minimum wage requirements under California law. They also indicate that Musk did not accept the salary.) The median of the total amounts of salary and annual bonuses paid over the last five fiscal years by the 10 companies to their Founder CEOs was approximately $1.6 million (based on amounts as reported in proxy statements). Four of the 10 comparator companies paid a salary of only $1 to their respective Founder CEOs, and two of those four paid no annual bonus to the Founder CEO.

In summary, the median salary and annual bonus of $1.6 million paid by the comparator companies during the last five fiscal years to their Founder CEOs contrasts with no salary or annual bonus paid to Musk at Tesla. On the other hand, the value of the Musk Option “overwhelms” the value of stock options and other equity grants made by the comparator companies to their Founder CEOs.

Issues Under Delaware Law

  1.   Corporate Waste
  • Musk already owns approximately 20 percent of the shares of Tesla. How much more motivation and incentive to remain as the leader of Tesla does the new stock option provide?
  • The value of the Musk Option “overwhelms” the median of the values of the equity grants to Founder CEOs of companies in the comparator group. As noted above, during their last five fiscal years, four of the 10 comparator companies did not make any equity award to the Founder CEOs.
  • The terms of the Musk Option do not restrict Musk as to activities outside of Tesla. (Apparently Musk is subject to “Tesla's standard confidentiality agreement” and a “Proprietary Information and Inventions Agreement,” both referenced in Musk's 2008 employment offer letter from Tesla.) Musk's current activities outside of Tesla include serving as chief executive officer at a major rocket company, SpaceX, and at two recent start-ups, The Boring Company (a tunnel-construction company) and Neuralink (a company in the business of artificial intelligence).
e.g.
  1.  Independence of Directors
Controlling Shareholder Issue In re Tesla Motors, Inc. Stockholder Litigation Extraordinary Size of Tesla Director Compensation Tesla Shareholder Approval of Musk Option

Complaint Filed in Delaware Chancery Court Regarding Musk Option

Tornetta v. Musk et al, supra. In re Tesla Motors, Inc. Stockholder Litigation, supra. Joseph E. Bachelder III is special counsel to McCarter & English, LLP.  Howard Berkower, a partner with the firm, and Andy Tsang, a senior financial analyst with the firm, assisted in the preparation of this column.