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The Big Elon Musk Cash Withdrawal That Wasn't. How One Small Error Lead To Big Erroneous Conclusions

|Includes: Tesla, Inc. (TSLA)

Last year, 2 articles were written about Elon Musk's stock sale and donation. Both concluded that Elon's generosity was only to himself and that he pocketed over $100 million. Note that this was despite the official story that Elon had not benefitted as these articles claimed.

These articles were incorrect.

The authors performed all of their income, tax liability and net benefit calculations on only the transactions that occurred in May 2016 at the time of Tesla's cap raise which included Elon's option exercise of 5,503,972 stock options, sale of 2,777,901 shares and donation of 1,200,000 shares. To that extent they were correct. However, they failed to include Elon's option exercise a few months earlier in January. BOTH exercises triggered tax liabilities since they were Non-Qualified Stock Options but the January exercise was not accompanied by a stock sale or donation to pay the taxes due, unlike the May exercise.

May 2016:

www.sec.gov/Archives/edgar/data/1318605/000149473016000007/xslF345X03/edgardoc.xml

www.sec.gov/Archives/edgar/data/1318605/000149473016000005/xslF345X03/edgardoc.xml

www.sec.gov/Archives/edgar/data/1318605/000149473016000004/xslF345X03/edgardoc.xml

Tesla's proxy pretty much spelled this out:

""As a result, there may be a significant disconnect between what is reported as compensation for a given year in such table and the value actually realized as compensation in that year or over a period of time."

"sale of 2,782,670 shares solely in order to pay $593 million in income taxes related to such exercise. Accordingly, this reported amount was not actually received in cash upon these exercises."

And most importantly:

TOTAL REALIZED COMPENSATION (Elon Musk):
2016 $45,999.
2015 $37,584
2014 $35,360

TOTAL REALIZED COMPENSATION includes...

..."plus (iv) any cash actually received in respect of any shares sold to cover tax liabilities as described in (ii) and (NASDAQ:III) above, following the payment of such amounts."

"Reflects the exercise of stock options with respect to an aggregate 6,711,972 shares, which were scheduled to expire in 2016. Of these, (NYSE:I) the exercise with respect to an aggregate 1,208,000 shares were not accompanied by a related sales of shares, and (ii) the exercise with respect to an aggregate 5,503,972 shares was accompanied by a related sale of 2,782,670 shares solely in order to pay $593 million in income taxes related to such exercise. Accordingly, this reported amount was not actually received in cash upon these exercises."

The proxy says "exercise of stock options with respect to an aggregate 6,711,972 shares". Unfortunately, this was not enough to convince some who continue to only evaluate the tax liabilities using the 5,503,972 figure from the May offering hence the point of this blog.

Here are the articles:

seekingalpha.com/article/3976390-tesla-e...

seekingalpha.com/article/3976306-tesla-g...

Tesla's finances are very complicated. Option exercises and associated tax implications are far less so. Despite my differences with the other authors, I don't think they intentionally misled anyone. They just made a mistake. Of course everyone makes mistakes. That said, if mistakes are made on the easier things there is certainly a greater possibility there are errors on the more complicated things, especially when one's predisposition may have some influence. If you read the articles, there is no mistaking their tone:

As Paulo Santos put it: 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."

"...not even in such a simple deal as a secondary". Sometimes things that are simple...aren't.

Tesla certainly brings out more than enough emotion to cloud the best judgment on both sides. Perhaps we all should stick to less emotional topic-like politics or race...

More info on NSOs:

The basics from Investopedia:

"A non-qualified stock option (NSO) is a type of employee stock option where you pay ordinary income tax on the difference between the grant price and the price at which you exercise the option."

A more complete explanation:

tinyurl.com/hdr8sk4

Disclosure: I am/we are long TSLA.