Early today Tesla announced a new stock incentive plan for Elon Musk. Let’s take a deeper dive into the specifics and examine the pros and cons.

First we need to understand what the new stock incentive plan is about. According to Tesla “the performance award consists of a 10-year grant of stock options that vests in 12 tranches. Each of the 12 tranches vests only if a pair of milestones are both met.” Basically, this stock plan expires in 2028 and has 12 stages or “tranches”.

In order for a “tranch” to be met, ONE market cap milestone and ONE operational milestone needs to be satisfied. For “the first market cap milestone, Tesla’s current market cap must increase to $100 billion. For each of the remaining 11 milestones, Tesla’s market cap must continue to increase in additional $50 billion increments. Thus, for Elon to fully vest in the award, Tesla’s market cap must increase to $650 billion.”

For the “operational milestones, Tesla must meet a set of escalating Revenue and Adjusted EBITDA targets. Revenue basically means the total amount of money Tesla brings in an an annual basis (before expenses). EBITDA stands for earnings before interest, taxes, depreciation and amortization. The eight Revenue targets are $20B, $35B, $55B, $75B, $100B, $125B, $150B, and $175B. And the eight Adjusted EBITDA milestones are $1.5B, $3B, $4.5B, $6B, $8B, $10B, $12B, and $15B.

So for Elon to get his first stock award, Tesla needs to reach $100B market cap AND have a revenue of $20B or an adjusted EBITDA of $1.5B. For each stock award, Elon will receive stock options that “correspond to 1% of Tesla’s current total outstanding shares (1% of that amount is approximately 1.69 million shares)”.

To give you an idea of how much the first stock award will be worth, Elon will be given 1.69M shares and at a $100B valuation TSLA would be valued roughly at $550/share (including minor dilution from now until then due to a possible capital raise and a continued stock employee plan).   According to Tesla’s Schedule 14a, Elon would have the option to purchase 1.69M shares at the stock price of $350.02.  So, he would pay $592M (1.69M x $350) for 1.69M shares that would be worth $930M if the shares were valued at $550/share at the time.  So, he would be earning about $340M, from which Elon would have to pay about 50% in taxes.  So he would net about $170M or so.

For each following stock award, Tesla would need to reach another $50B in market cap and achieve another revenue/EBITDA milestone. And as Tesla market cap increases, so does the value of the 1.69M stock award. For example, if TSLA stock is valued $1500/share, then a 1.69M share award would be worth $1.94B (1.69M x $1500/share – $350 option exercise price).

(note: for those interested I’ve created a public google spreadsheet to show the numbers behind how and when each tranch vests, and ultimately how much Elon is able to net)

If Elon is able to accomplish all 12 tranches (Tesla reaching $650B market cap and 12 of the 16 revenue/EBITDA milestones) then he will be awarded a total of roughly 20M shares. Tesla currently has 169M outstanding shares.  According to my calculations, the total stock option award would be worth $54 billion if Elon exercised all 12 tranches in 2028 (at time of expiration).  After roughly 50% in taxes, Elon’s net value of the stock would be about $27 billion.

The above table based off of the following assumptions:
1. outstanding shares go up 3M from current 169M by time Tranch 1 is met
2. outstanding shares go up by 4M between tranches (includes Elon’s stock option grant, employee stock plans, and cap raises)
3. Tax rate is 50%. Assuming taxed as income and includes federal and california state taxes.
4. Elon’s “net” is value of stock received because he has required 5 year holding period after exercising option

The hope is that the audacious offer based on very aggressive milestones will give added incentive for Elon to keep very involved in Tesla even as his other companies vie for more and more of his attention.

As a Tesla investor, I am happy that Tesla is formally making their market cap goals pubic and clear. Elon has shared on numerous occasion that Tesla has the potential to be one of the most valuable companies in the world. Now, the board and the entire company is not just talking the talk but putting down their expectations on paper. This gives a kind of roadmap detailing the type of appreciation Elon and Tesla believe is possible with TSLA stock, and can help shareholders weigh the risks and rewards more clearly.

However, this plan does have some elements that are far from perfect.

First, I personally think the revenue targets are not aggressive enough. The first target is $20B and already Tesla reached more than $10B in revenue for 2017. So with the additional Model 3 revenue from 150-200k cars this year, Tesla should be able to reach $20B in revenue in 2018. Also, in 5-7 years if Tesla can sell 3M cars at an average price of $40,000, then that would be $120B in revenue. If you add Tesla Energy, perhaps the total revenue would be about $150B. This would meet 7 of 8 of the revenue targets (FYI, the eight Revenue targets are $20B, $35B, $55B, $75B, $100B, $125B, $150B, and $175B).

My suggestion would be for Tesla to increase the revenue targets to make them slightly more aggressive. Perhaps, the 8 revenue targets could be $25B, $40B, $60B, $85B, $115B, $140B, $180B, and $225B.

Second, the adjusted EBITDA milestones could also be slightly more aggressive (currently they are $1.5B, $3B, $4.5B, $6B, $8B, $10B, $12B, and $15B). I would suggest EBITDA milestones of $1.5B, $3B, $5B, $7.5B, $10B, $13B, $17B, and $20B. This would give greater incentive to be profitable and I think is more in line with the market cap milestones.

Further, the stock incentive plan allows Elon to step down as CEO and serve as Executive Chairman of the Board and Chief Product Officer. Tesla explains:

For vesting to occur when the milestones are met, Elon must remain as Tesla’s CEO or serve as both Executive Chairman and Chief Product Officer, in each case with all leadership ultimately reporting to him. This ensures that Elon will continue to lead Tesla’s management over the long-term while also providing the flexibility to bring in another CEO who would report to Elon at some point in the future. Although there is no current intention for this to happen, it provides the flexibility as Tesla continues to grow to potentially allow Elon to focus more of his attention on the kinds of key product and strategic matters that most impact Tesla’s long-term growth and profitability.

In almost any other company, if a CEO steps down they are not allowed to keep their stock incentive plan.  However, Elon’s a unique case since he provides great value to Tesla even if he’s not their day-in-day-out CEO.

It was largely Elon’s vision and conviction that saw the Model S through and made the Model 3 a reality.  And Tesla is just getting started.  The Model 3 provides Tesla an amazing product to build upon.  In fact, after owning the Model 3 now for a few weeks I think the Model 3 is at least 5-8 years ahead of what other car manufacturers are able to do.  In other words, I don’t expect to see a worthy competitor to the 2018 Model 3 until at least 2023… but by 2023 the Model 3 will be much improved (in performance and value).  So, it’s likely going to be a futile chase for other car makers.

Tesla is in an amazing position right now, and without Elon’s radical vision and extreme conviction they wouldn’t have reached this place.  I think we need to give credit where credit is due.  I am not trying to discredit the thousands of employees at Tesla, or the key members of Elon’s management team, or even the many investors who risked a lot to back the company.  However, Elon is what gives Tesla it’s extra “x factor”.  It’s what makes Tesla not just a good company, but an amazing company.  And that’s why to the Tesla board, Tesla at $60B market cap is just the beginning, especially with Elon leading the way.  And this stock incentive plan is an expression of that belief.

So, I completely understand why the board is allowing Elon to “hire a CEO” whenever he wants.  It’s because they believe Elon will still remain fully committed to lead Tesla to where it needs to go, and that he can do that in a different role than CEO (ie., as executive chairman and chief product officer).

I’ve always thought that when Elon Musk steps down as CEO that he would remain as executive chairman of the board and as Chief Product Officer.  It makes sense for several reasons.  First, Elon still is the largest stakeholder in Tesla and he’s publicly committed to be the last person to sell TSLA shares.  So, Elon has a lot at stake even if he’s not CEO.  And the best way to steer Tesla if he can’t be CEO would be to chair the board and to oversee the quality of Tesla’s products (ie., as Chief Product Officer).  I personally think even without this new stock incentive plan that Elon would still keep involved and would still be committed to Tesla.  However, with the addition of the stock incentive plan, it could “incentivize” Elon a bit more.  It could help him commit that little extra and take those additional risks (albeit well-calculated ones) to grow Tesla as a company.

Or perhaps the new stock incentive plan will help and incentivize Elon to bring grow some of his new business ideas within Tesla (ie., like a flying car or supersonic vertical takeoff/landing jet).

Or even better yet, perhaps the stock incentive plan could somehow help with a merger between Tesla and SpaceX, and bring his main ventures together.  And while we’re at it, perhaps bringing in Boring Company and Neuralink as well.  All under one umbrella holding company.

All in all, I’m okay with this new stock incentive plan.  It does offer quite a lot of shares (20 million shares) to Elon to take Tesla to the $650B promised land.  And it doesn’t guarantee Elon will remain CEO.  I don’t think anything would.  But, what it does do is provide some added incentive and some tangible goals for Elon to reach for and for Elon to do so within Tesla (vs starting other companies).

I think Tesla shareholders will generally be very happy to vote in favor of this new stock incentive plan. I know I will. I do hope though that Tesla does consider revising the revenue and EBITDA milestones to be slightly more aggressive, especially considering that the plan doesn’t require Elon to stay as CEO.

Finally, Tesla notes “Although the Board granted this award to Elon on January 21, 2018, its effectiveness is subject to the approval of Tesla’s shareholders, who will be asked to approve it at a special shareholder meeting that will be held in late March.


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