I'd be smiling too!
What I am about to cover in this article would have been some kind of side issue if applied to another company. After all, what an executive or shareholder does with his compensation and how he handles his taxes are his own affair.
However, with Tesla (NASDAQ:TSLA), Elon Musk is more than just an executive or shareholder. He's the second coming of Steve Jobs, and his supposed genius is what stands between Tesla's success and a high-speed financial crash. If someone else was guiding Tesla, for certain the market wouldn't give it half the valuation it carries. For believers, Tesla literally isn't just about EVs. Tesla is also about landing rockets in the middle of the ocean, guided by the mighty hand of Musk.
This was never clearer than when these believers reacted to the development of the Gigafactory story. When originally announced, the Gigafactory was about two things the competitors could never do:
- It was about having the needed batteries when launching the high-volume Model 3.
- And it was about having those batteries at an additional 30% savings versus all other possible competitors.
Fast forward to now and the Gigafactory's construction has already clearly been delayed beyond the estimated October 2017 date, while the supposed Model 3 production "en masse" was brought forward to 2017-year end. These two events clearly say that:
- It is (in Tesla's mind) possible to get the necessary quantity of batteries without the Gigafactory.
- And the savings from the Gigafactory won't be present.
Of course, critics like me, Montana Skeptic and others always said this - that the Gigafactory was unnecessary and that it couldn't deliver the savings even if built. But the extraordinary thing here is that in spite of this being obvious, believers have somehow managed to rationalize that the new course of action is not a problem.
This is so because, as with everything surrounding Tesla, Elon Musk said so. Elon Musk did this by saying that the Gigafactory isn't critical anymore. Presumably, not critical to get the necessary supplies and also not critical to get the savings versus competitors, either.
I could say that such is, again, irrational. If Tesla has no cost advantage over competitors it has a huge problem. It has a huge problem because its competitors will be incentivized to sell even at breakeven prices, since they remove the need to buy ZEV credits for the rest of their fleets, effectively getting a return on their EVs through another route. Moreover, they'll be incentivized to proceed that way to establish a market share beachhead and credibility in the new EV space. Also, one should remember that if Tesla has no advantage when it comes to the actual parts going into the cars, it most certainly will have a disadvantage when building the cars. This is so because other automakers have much greater efficiency building those cars as well as much larger economies of scale doing so.
But the article isn't even about that new irrationality. Instead, it's about Elon Musk's word. Elon Musk's word needs to stay believable and retain its power. Recently, this power faltered when nobody believed Tesla will actually deliver the Model 3 in mass quantities by the end of 2017 - or even during 2018. Still having his power to keep the masses deluded is thus under question. It thus doesn't help for the common investor to know what I am going to report next.
The Musk Aura Is Menaced By Yet Another Untruth
To keep the idea that Musk remains fully committed to Tesla's success, Goldman Sachs, in its shameless secondary just one day after pumping the stock with an upgrade, built the operation so Elon Musk could sell a lot of stock while seemingly he wouldn't really sell any.
Thus, the operation involves Elon Musk:
- Exercising 5,503,972 stock options.
- Selling 2,777,901 of the resulting shares specifically to pay taxes on the whole stock option exercise.
- Donating 1,200,000 shares to a charity.
- And keeping another 1,526,071 shares.
This was described as follows to give the idea that Elon Musk won't be getting any cash from the transaction, that all proceeds will go towards paying taxes and that he will actually end up with a larger number of shares (emphasis is mine):
All of the net proceeds Mr. Musk will receive will be used to satisfy taxes that he will incur in connection with the option exercise. As a result of this option exercise and sale, and even after giving effect to Mr. Musk's donation of 1.2 million shares of our common stock owned by him to charity, the net result of these transactions is that the number of shares of our common stock held by Mr. Musk will increase.
As with anything involving Elon Musk and Tesla, this actually needs parsing. Leaving aside the fact that a deep in the money stock option is the same as holding a share, something Montana Skeptic has already covered and means Elon Musk's exposure to Tesla was reduced, there are still more doubts regarding the cash Elon Musk will receive from the offering.
You see, there's a measure of truth regarding the proceeds being supposedly used to pay taxes. If you account for the 5.5 million shares being sold at an estimated $204.66 and for the exercise price on the options to have been $6.63 (thanks again, Montana), then this produced a $1.09 billion taxable gain.
The top income rate for individuals in California is 12.30%. The top Federal income rate in the US is 39.60%. These two together add to a 51.90% rate to be applied to that taxable gain. This produces a $565.7 million tax bill.
As for the proceeds from the sale, the ~2.8 million shares at $204.66 give rise to $568.5 million in proceeds. Taking away commissions from the sale, tax advisers and what not, it's quite possible the small difference between the two values nets out to zero. So, if we stopped here, the claims made during the secondary would actually be truthful.
But, again, this is Goldman Sachs, Elon Musk and Tesla we're talking about here. So the story doesn't end here.
The Rest Of The Story
Remember, in the middle of all that operation Elon Musk is a Good Samaritan. He's out there saving the world with the EVs, taking humanity to Mars and giving out 1.2 million shares to charities as well.
Oh, wait, giving large donations to charities isn't exactly tax neutral! Let's check this a bit further. I am not exactly a tax adviser based in California or something, so a specialized professional would probably do better, but here's the thing:
- Both at the state level and at the Federal Level, there are possible deductions for donations to charities. There have varying natures, but can easily be used to deduct 20-50% of the gross income.
- It's thus not a coincidence that Elon Musk's donation is ~22.5% of the taxable gain. This is so because for long term gains of the kind Elon Musk will post, up to 20% of the gross income can be deducted. Of course, Elon Musk will have other income beyond this gain which can also be covered, hence the small excess (22.5% vs 20%).
- Thus, Elon Musk is likely to see his tax bill be 20% lower than the amount used to say "he's just selling to pay taxes". This is so because the $245.6 million donation is used to deduct from the $1090 taxable gain. If we assume up to 20% of the taxable gain can be deducted, then the taxable gain becomes $872 million instead of $1090 million. To this we apply the 51.9% tax rate, and Elon gets to pay $452.5 million in taxes instead of $567.5 million. The difference, ~$113 million, he gets to keep.
So, again, things aren't exactly as first told.
As with many other events surrounding Tesla, words require parsing. The story is that Elon Musk is not keeping any cash from the shares he'll be selling during the Goldman Sachs secondary.
The story, as with many others before, is untrue. I estimate Elon Musk might get to keep ~$113 million. Of course, I might be wrong even with this estimate, and only his tax advisers will know the exact amounts. But the amounts are significant.
As with anything Tesla, Caveat Emptor is needed. The story is not as told, not even in such a simple deal as a secondary. Elon Musk is selling stock to keep large amounts of cash from the sale, and not just to pay his tax bill.
Disclosure: I am/we are short TSLA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.