Tails You Lose, Heads You Lose

One of the traditional hallmarks of the United States is that it was a nation in which anyone could achieve success if they worked for it and they would be rewarded for their success.

Elon Musk grew up in South Africa and it was always his dream to come to the United States to achieve success. He knew that was not possible in his home country. If he had stayed in South Africa he would have probably ended up being a Physics professor.

Musk made it to the United States when he attended the University of Pennsylvania where he earned two undergraduate degrees---Physics and Economics.

After graduation he headed to Silicon Valley in California where he became a serial entrepreneur.

He was a principal in two successful tech ventures that he developed and sold--one of which was PayPal--which put a substantial amount of money in his pocket.

This allowed Musk to pursue what could be described as two core visions he had going back to the time he was a student.

Building a spaceship capable of traveling to Mars and developing an electric car.

Today we see Musk's SpaceX company and Tesla as the fulfillments of that vision from over 30 years ago.

In 2008, despite 15 years of effort, Tesla had not shown a profit in any given year

The Tesla board approved a compensation plan for Elon Musk that would provide him stock options based on meeting a number of revenue and profit goals as well as meeting a market capitalization target of at least $650 billion.

At the time the performance compensation plan was approved by the shareholders (73% voting in favor) it was clearly known that Musk would be eligible to receive $55 billion in stock options in Tesla stock if he was successful. Even then, based on the terms of the plan, that once exercised Musk would still need to retain the stock for at least five years before selling.

At the time, Tesla's market cap was less than $60 billion, and as stated above, it had never shown a profit.

The compensation deal would provide Musk no other pay---no annual salary, no annual bonus, no annual stock options---his entire pay from Tesla was dependent on meeting the ambitious goals in the performance plan.

In 2018, when Musk's pay plan was approved, The New York Times did a story on it saying that it may have been the boldest pay plan in history. It also cited experts who called it "laughingly impossible" and others who called it a publicity stunt to cover up for continuing production problems and operating losses.

The article compared Musk to P.T. Barnum as someone who only portrays an "illusion of success while consistently missing production estimates".

In short, it was viewed at the time that it would be next to impossible for Musk to collect on the pay plan. The goals were too ambitious.

The Times story from six years ago also reported that one short seller of Tesla believed the company was worthless seeing that it had recently been losing a half million dollars an hour.

 

Source: https://www.nytimes.com/2018/01/23/business/dealbook/tesla-elon-musk-pay.html?smid=nytcore-ios-share&referringSource=articleShare&sgrp=c-cb

This was the state of Tesla when the pay package was approved by its board and shareholders.

If Tesla continued in this state Musk would have worked the next five years for no pay at all--ZERO, NADA, ZILCH.

It is important to remember all of this as context for what follows.

A shareholder who owned the grand total of nine shares of Tesla stock filed a shareholder derivative lawsuit claiming the pay plan was excessive and asked ta Delaware court (the state of incorporation for Tesla) to rescind it.

A Delaware Chancery Court judge invalidated the pay plan last week ruling that it was excessive and that the Tesla board was not sufficiently independent or adversarial in establishing the plan for Musk. She further ruled that the shareholder vote approving the plan was invalid in that the shareholders were not sufficiently informed about the Board's lack of independence and some other details about the plan.

The judge rescinded the entire plan has the effect that Musk will have received no compensation at all from Tesla for anything he has done for the company since 2018.

What has Musk done for Tesla since 2018?

Revenues.

Net Income.

Total Market Capitalization

Stock Price.

Tesla stock was trading at around $20/per share when the compensation plan with Musk was adopted.

The stock ultimately traded for over $400/per share. That is 20x what it was when the pay plan was approved in 2018.

Even after the stock has pulled back, Tesla shareholders who owned the stock when the pay plan was adopted, have seen their stock increase almost 10-fold.

Shareholders have also earned at least ten times the value of any compensation Musk would have gotten under the plan---$600 billion or so in additional value.  The plan proposed that Musk would get an additional 6% of Tesla stock for that $600 billion of increased value.

The plan would have meant that Musk would have received no compensation at all should Tesla not have met the ambitious goals established. Tails you lose.

 

In fact, Musk led Tesla to heights that almost no one thought possible back in 2018.

However, he did succeed.

What is the reward for his success? Nothing. Zero. Zilch. Heads you lose.

There is something fundamentally wrong in all of this.

How is it that a single, solitary judge in Delaware can do something like this and it can be called justice?

Rescinding a compensation deal that was approved by the Tesla board?

Cancelling a deal that was approved by a super majority of the company's shareholders?

Overlooking the massive value that Musk added to Tesla and its shareholders?

Leaving Musk with absolutely no compensation for six years of effort.

There was a time in the United States when success was celebrated.

There was a time when a deal was a deal.

No one in Delaware would have cared one iota if Elon Musk had run Tesla into bankruptcy while chasing his dream of building a revolutionary electric car.

What is worse is that Elon Musk created an electric car that none of the global car companies can match, created over a half billion in value for its shareholders and the effect of the ruling is he does not get one cent of compensation for any of his efforts?

In reading the Judge's opinion you get the sense that she believes that Tesla would have succeeded and prospered without Musk getting one additional cent of compensation. 

Elon Musk was already rich. He already owned 22% of Tesla. He had every incentive to make Tesla successful. He didn't deserve another 6% of the stock for his efforts according to the judge's ruling.

It is a common trait you see often in the minds of liberals.

They see the harvest that the United States has provided but neglect the seeds that were sown to make it so.

They think it just happens. The harvest will be there no matter what.

It doesn't matter how much we tax, how much we borrow, how many illegals cross the border or how much we push DEI and ignore merit.

It doesn't matter if we defund the police, do not arrest people for stealing less than $950 or let those we do arrest out with no bail.

They don't see the connection between incentives and results.

They assume you can seed the craziest policies across our landscape and the harvest will always be there.

They don't understand that incentives drive behavior---both good and bad.

There is also something in all of this is very troubling.

Elon Musk was the treated like a conquering hero by the mainstream media and the government establishment when he was making Tesla successful and saving the U.S. space program with his SpaceX rockets.

Since he bought Twitter and challenged government censorship of social media ,and the mainstream media news outlets see X as competing for viewer eyeballs, he has suddenly come under all sorts of scrutiny by the Biden administration and mainstream media.

Consider the numerous stories in the mainstream media about drug use by Musk including allegations of consuming with some of his board members. Coincidental?

However, Musk has stated that he has undergone drug testing as a requirement of his work with NASA which have not even found trace amounts of drugs in his system.

Source: https://www.forbes.com/sites/zacharyfolk/2024/01/07/elon-musk-claims-not-even-trace-amounts-of-drugs-in-his-system-after-report-detailed-drug-concerns-from-tesla-spacex-execs/?sh=95f6b9634878

Another example is the DOJ sued Musk's SpaceX last year because it would not hire illegal immigrants at SpaceX.

The Biden administration wants to force Musk to hire illegal immigrants to work at a company that has the most advanced rocket science in the world and is working on many projects with national security implications?

Seriously?

Source: https://www.justice.gov/opa/pr/justice-department-sues-spacex-discriminating-against-asylees-and-refugees-hiring

Let's also not forget that the compensation decision just happened to be rendered by a judge in Joe Biden's home state as well. Yes, Tesla was incorporated in Delaware. However, no one can cite any other example where a court in that state has rescinded a shareholder approved pay plan.

I guess sometimes it just does not pay to be successful.

That is especially true today when you are not aligned with the powers that be.

Tails you lose.

Heads you lose.