- Tesla CEO Elon Musk is close to unlocking the second part of his massive compensation agreement with the electric carmaker.
- We decided to look at just how much more wealth Musk would have if the full package pays out.
- He would likely be in the same range as Jeff Bezos or Bill Gates, and could possibly become the world’s richest person.
- Visit Business Insider’s homepage for more stories.
Elon Musk is very close to unlocking a $2.1 billion payout from Tesla as a result of his elaborate compensation agreement with the electric carmaker. We decided to take a look at just how massive Musk’s wealth from that plan could eventually be.
Tesla’s stock has been on a wild tear in 2020, with its price more than tripling since the start of the year as of mid-afternoon Thursday. The stock shot up in after-hours trading after Wednesday’s quarterly earnings report beat investors’ expectations before pulling back somewhat on Thursday. Earlier this week, the company hit the second key milestone in Musk’s compensation plan by maintaining an average market capitalization over $150 billion for six months. That galloping valuation, once confirmed and approved by Tesla’s board, could unlock a multi-billion-dollar paycheck for CEO Elon Musk.
In 2018, Tesla announced an ambitious executive compensation plan for Musk. Under the terms of the plan, Musk is slated to receive up to 12 batches of stock options, called tranches, that could vastly increase his ownership stake in the electric carmaker.
And with that: vast personal wealth.
Putting the Tesla compensation into perspective
The pay package is potentially massive. The SEC requires companies to annually file the total compensation of their chief executives. In Tesla’s 2019 filing, the company reported that Musk “made” $2.3 billion in 2018 as a result of the compensation plan. However, that was just an estimate of what the fair value of the package was at the time, and Musk has not yet actually realized any value from the plan.
For comparison to that reported $2.3 billion, Microsoft CEO Satya Nadella made headlines with his 2019 compensation of nearly $43 million — a tiny fraction of Musk’s headline number.
We decided to take a back-of-the-envelope look at what Musk’s stake in Tesla could be worth if the full package is unlocked. It’s worth noting, and we’ll look at why below, that this is a very approximate calculation, and there are a lot of factors that could affect just how rich Musk could become.
It’s also worth noting that we’re going to be looking just at Musk’s wealth from his Tesla holdings. While the majority of his net worth comes from his ownership share in the electric car maker, he also holds other investments, including his interest in his rocket company SpaceX.
However, as we’ll see below, if Tesla becomes as valuable as it needs to be to fulfill the full terms of the compensation plan, Musk’s Tesla stock would likely dwarf any other part of his portfolio.
Tesla’s audacious compensation plan
Under the terms of the compensation agreement, Tesla needs to achieve some very ambitious sales and profitability milestones, and the company’s market capitalization has to hit $650 billion for the full package to be unlocked.
As of the time of writing, two of the sales and profitability milestones have been met, and Tesla’s board confirmed that the first market capitalization milestone of $100 billion was met in late May, unlocking the first set of stock options available to Musk. The company hit the second market capitalization milestone, maintaining an average valuation of $150 billion over six months, earlier this week, although this remains subject to official confirmation by the company board.
It’s worth noting that the full set of goals are extremely ambitious. A market valuation of $650 billion would put Tesla on par with tech giants like Amazon, Microsoft, and Google. Tesla’s market cap would be over 13 times the size of GM’s current $47.7 billion valuation.
In the event that the full set of goals in the compensation plan are achieved, Musk will receive more than 20 million options that each entitle him to purchase a share of Tesla stock at a price of $350.02, according to the company’s SEC filing announcing the plan. If he exercised all of those options at the $3,504 price needed to get a $650 billion market cap at the current number of outstanding Tesla shares, he’d net a whopping $64 billion.
Musk already owns a lot of Tesla stock
But in addition to the payday from the compensation agreement, Musk already owns a large fraction of Tesla. According to the company’s most recent proxy statement filed with the SEC, as of December 31, 2019, Musk owned 38,658,670 shares of Tesla’s stock.
That holding would be worth an astonishing $135 billion if Tesla were to hit a price of $3,504 per share, as would be needed to hit the final market capitalization goal at the current number of outstanding shares. That alone, without even considering the value of the additional shares Musk would get from the compensation agreement, would easily make him the wealthiest person on the planet.
When you combine Musk’s current Tesla holding with the additional $64 billion from the compensation agreement, Musk’s Tesla wealth would be worth around $200 billion. That’s higher than the total fortunes of Jeff Bezos or Bill Gates, the first- and second-wealthiest people alive. Bezos had a net worth of about $178 billion and Gates was worth about $118 billion as of July 23, 2020, according to Bloomberg.
But things are more complicated
There are a lot of caveats to this kind of calculation. The above estimates reflect something of an upper bound on Musk’s potential Tesla wealth.
One big factor is share dilution, or an increase in the number of Tesla shares available on the market. The above calculations are all based on the current number of outstanding Tesla shares, which stands at 185,475,000 as of July 23. That number could (and is expected to) increase from the company creating new shares for stock-based compensation for employees other than Musk, or from potentially selling new shares to investors to raise capital.
An increase in the number of outstanding shares, then, means that Musk’s current and potential stockpiles of shares would represent a smaller percentage ownership stake in the company. For the purposes of calculations like the one above, a larger base of shares also means a lower per-share price to hit the various market capitalization thresholds.
The 2018 proxy statement from Tesla that detailed the compensation agreement discusses this. According to the company, based on the already-planned for stock dilution from existing employee equity payment agreements and other financial instruments that could lead to new shares of stock being issued, like convertible notes, the theoretical maximum value Musk could realize with the full package is somewhere in the neighborhood of $55 billion, about $10 billion less than the payout estimated above.
The company took pains to note that the $55 billion estimate factors in only already existing sources of share dilution, and that further shares will almost certainly be created, further reducing the maximum potential value of Musk’s payout.
More shares, less profit
To get a sense of how all this could affect our estimates of Musk’s potential future wealth, let’s consider a scenario where the number of outstanding Tesla shares roughly doubles via share dilution to 360,490,000. In this case, the company will have a $650 billion market cap at a per-share price of $1,803.10.
At that price, Musk would net about $29.4 billion from exercising his 20,264,042 options, and his current holdings would be worth $69.6 billion. Together, that would give Musk a net worth from his Tesla holdings just shy of $100 billion, still putting him in the neighborhood of the world’s richest person, even with our hypothetical very high degree of share dilution.
Taxes would also hurt
Another big factor is taxes. Tesla pointed out in the 2018 proxy statement that the value Musk would get from exercising any of the options granted under the plan would be counted as taxable income. That could take a big bite out of his fortune as a result of the plan.
Calculating the exact tax bill from the options vesting would be subject to at least as many caveats and conditions as our estimates of the value realized, but it’s likely that it would be quite high should Musk unlock the full benefits of the plan.
Tesla and Musk still have a long way to go
Of course, this all remains theoretical. To unlock the full package, the company’s valuation would need to more than double within the next eight years beyond its already incredible gains.
Further, to achieve the operational milestones that also need to be hit for Musk to get all 12 batches of options, Tesla’s revenues and earnings will also need to massively grow.
None of these outcomes are guaranteed, and therefore neither is Musk’s pay under the compensation plan. A big crash in Tesla stock or a few quarters of subpar revenue or earnings growth could hamper Musk’s prospects.
These are all very back-of-the-envelope estimates, and as noted, there are a lot of factors that could go into what exactly Musk’s net worth would be should Tesla achieve the lofty heights of the compensation plan.
But, whatever the details end up being, if Tesla actually does achieve the $650 billion market capitalization and huge growth in sales and profits required for Musk to get the full benefit of the compensation plan, he would own a very large share of one of the most valuable companies in the world, and would be at or near the very top of the list of the world’s richest people.
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