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Musk could be just months away from a $346 million payday, and that's just the start.
- Tesla's stock just closed above a $100 billion market capitalization for the first time on Wednesday.
- That starts the clock on Elon Musk receiving the first tier of a potentially massive payday.
- If the company's stock price stays high enough to maintain that valuation for six months, he'll unlock stock options that could net him $346 million.
- That payout would be just the first of 12 "tranches" of stock options that could be worth billions if the company's hyper-ambitious goals are achieved in the next few years.
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Tesla has hit a pretty remarkable milestone: The company's value on the stock market is now above $100 billion for the first time.
Successful companies hit dramatic, big-round-number thresholds all the time, with several tech companies like Apple, Google, and Microsoft currently over the $1 trillion valuation mark.
But Tesla's new 12-figure market cap could be extremely important to its CEO Elon Musk: A sustained $100 billion valuation over a six-month period unlocks the first part of Musk's massive 2018 compensation package with the company.
That agreement was valued at more than $2 billion in a company filing with the Securities and Exchange Commission, but Musk has actually realized no value from it yet, providing an excellent example of how CEO pay has become extremely complicated.
In Tesla's own stated estimate in the proxy statement laying out the plan, the total package could end up being worth as much as $55.8 billion to Musk.
The compensation agreement between Musk and Tesla is structured around 12 "tranches" of stock options, each equivalent to roughly 1% of the total number of outstanding shares at the time of the agreement. Each tranche - basically, a financial treasure chest that will be unlocked should certain conditions be met - vests and becomes available to Musk once a certain number of operational milestones and stock market capitalization goals have been achieved.
In other words, that means Tesla has to massively increase its sales and profits, while also becoming one of the most valuable corporations in the entire US stock market, in order for Musk to get paid.
The operational goals are based on the company dramatically improving sales and profits, and are tied to increasing levels of top-line revenue and bottom-line earnings before interest, taxes, and depreciation (EBITDA).
Here are those revenue and earnings milestones, per the agreement. According to the company's most recent quarterly filing with the SEC, as of September 30, 2019, Tesla had achieved the first of the revenue and EBITDA goals, meaning that two operational milestones have been achieved.
Business Insider/Andy Kiersz, data from Tesla
Tesla needs to hit these revenue and earnings milestones for Musk to get paid.
Each of the 12 tranches of stock options vests and becomes available for Musk to use when both of the above operating milestones and one of the market capitalization milestones have been achieved. Below, we walk through how the market cap milestones work, and what each tranche could be worth to Musk.
The latter milestones start at a market capitalization, or the total value of all outstanding Tesla shares combined, of $100 billion, and increase by $50 billion for each additional tranche. As mentioned earlier, that valuation needs to be maintained for six months before Musk's options vest.
So far, two of the operating goals have been met, while none of the market cap goals have been hit. That means none of the tranches have vested yet.
However, Wednesday's closing price put Tesla's market cap over $100 billion for the first time, meaning that Musk is now on the path to unlocking the first set of options.
According to Yahoo Finance, Tesla has 180,245,000 outstanding stock shares. Based on that, Tesla has a market capitalization of at least $100 billion once the stock price is above $554.80 per share, since market capitalization is just the number of shares times the per-share price. Tesla's price closed at around $570 Wednesday, putting the market capitalization above the threshold.
Each tranche of options, once vested, entitle Musk to buy up to 1,688,670 shares of Tesla stock at a price of $350.02 per share, or the closing price at the time of the agreement. So, if Tesla's stock is trading right at the $554.80 level needed to hit a $100 billion valuation, he'd essentially net a profit of $224.78 per share, making the overall first tranche worth just shy of $346 million.
Following a similar logic, here's the value of each of the 12 tranches at the stock price needed at the current number of outstanding shares to hit each market cap milestone.
Business Insider/Andy Kiersz
Along with the operating milestones, the company's stock also needs to hit dramatic highs, which also increase the potential value of Musk's options.
It's worth noting that the above table is a very rough and simplified estimate of what Musk could make as a result of the compensation agreement. As an example of one caveat, the filing describing the agreement pointed out that the company regularly compensates other employees with stock or options, meaning that there is likely to be some dilution in the value of Musk's potential shares, with somewhat lower stock prices triggering additional market capitalization milestones as new shares are created and issued.
Still, that agreement estimates that the full agreement could be worth as much as $55.8 billion should all 12 tranches vest. That would vault Musk from being an already extremely wealthy person into the very top tier of billionaires.
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