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> If he hits the trigger in his compensation package, he gets even more Tesla stock which will vastly increase his net worth on paper. Elon currently holds ~34

by zaroth 7y ago

> If he hits the trigger in his compensation package, he gets even more Tesla stock which will vastly increase his net worth on paper. Elon currently holds ~34 million shares of Tesla. If TSLA market cap hits a 6-month running average of $100 billion his first of 12 tranches of stock options vest, which is 1.69 million shares at $350 per share. Musk will spend $591 million to buy the 1.69 million shares, which on the open market are worth $1.352 billion. What actually happens is he executes the options and immediately sells shares to cover the execution cost, for a net gain of ~950k shares. He then also has to sell shares to cover the taxes due at the time of exercise, which we'll under-estimate at 20% of the profit ($450 * 1.69 million * 20%) = $152 million. That's another 190,000 shares gone. Now we're down to a net gain of 760k shares on the 1.69 million. So when the tranche vests, he will own ~2.2% more TSLA stock than he did the day prior. Best case. If tax rate is higher, which it is because California, it's probably less than a 2% bump to Elon's overall TSLA holding. EDIT: Oh, one other thing. Any shares which are not sold to cover the strike price and the taxes due I believe must be held by Elon at least 10 years before he can sell any. So the primary effects of hitting a tranche are 1) it generates $591 million of cash flow for Tesla, a nice equity raise. 2) it generates at least $150 million in tax revenue for We The People.

gamblor956 7y ago
2.2% more stock is a huge amount of stock when you're already talking about the company's biggest individual shareholder. That aside, a HNWI would never liquidate stock to exercise options or to pay taxes, since each action triggers a realization event and an associated tax liability. They would take out loans secured by the stock, since that doesn't result in a huge tax bill. So in the real world, Musk would use the $591 million cash he already has in the bank (having previously taken out loans against his Tesla shares) and use that to exercise his options. He would then use some of the remaining few billion in his bank account (again, from the loans secured by his Tesla shares) to pay any state and federal taxes owed. The only time HNWIs deliberately trigger taxable events is when they have losses or credits to absorb the resultant tax liability.
- zaroth 7y ago
  I believe that the taxable event happens when the option is exercised, whether any shares are sold or not. Actually selling the shares doesn’t change the amount of tax due. I don’t know that he will sell shares to cover the strike price or the taxes, but I can say certainly it is explicitly permitted for him to sell shares only for that reason. Otherwise they must be held for at least (EDIT) 5 years post exercise. He can simply hold the vested option but not exercise it. All options expire by 2028, and all vested options must be exercised within 1 year if he loses the CEO title. He does not gain any shareholder rights from those shares until the options are exercised. So this delays the payment of the strike price and taxes, but does not alter the basic math. In short, a 2% bump in his equity position is below the noise floor of the daily price change of the actual shares. Frankly it almost makes you wonder what’s the point. Once you own double digit percentages of an asset that could appreciate more than 10x it’s more important to focus on the size of the pie than the size of your slice. The vast change in Elon’s wealth was through achieving an IPO and getting the share value upwards of $800. An extra few million shares to him is the same as the difference between selling on a Monday or a Tuesday.

by zaroth 7y ago

gamblor956 7y ago

2.2% more stock is a huge amount of stock when you're already talking about the company's biggest individual shareholder. That aside, a HNWI would never liquidate stock to exercise options or to pay taxes, since each action triggers a realization event and an associated tax liability. They would take out loans secured by the stock, since that doesn't result in a huge tax bill. So in the real world, Musk would use the $591 million cash he already has in the bank (having previously taken out loans against his Tesla shares) and use that to exercise his options. He would then use some of the remaining few billion in his bank account (again, from the loans secured by his Tesla shares) to pay any state and federal taxes owed. The only time HNWIs deliberately trigger taxable events is when they have losses or credits to absorb the resultant tax liability.

zaroth 7y ago
I believe that the taxable event happens when the option is exercised, whether any shares are sold or not. Actually selling the shares doesn’t change the amount of tax due. I don’t know that he will sell shares to cover the strike price or the taxes, but I can say certainly it is explicitly permitted for him to sell shares only for that reason. Otherwise they must be held for at least (EDIT) 5 years post exercise. He can simply hold the vested option but not exercise it. All options expire by 2028, and all vested options must be exercised within 1 year if he loses the CEO title. He does not gain any shareholder rights from those shares until the options are exercised. So this delays the payment of the strike price and taxes, but does not alter the basic math. In short, a 2% bump in his equity position is below the noise floor of the daily price change of the actual shares. Frankly it almost makes you wonder what’s the point. Once you own double digit percentages of an asset that could appreciate more than 10x it’s more important to focus on the size of the pie than the size of your slice. The vast change in Elon’s wealth was through achieving an IPO and getting the share value upwards of $800. An extra few million shares to him is the same as the difference between selling on a Monday or a Tuesday.