The 2012 CEO grant

[Clprenz]

anybody want to explain what this document means to us shareholders?

 

[dsm363]

Do you have a link?

 

[PureAmps]

I believe this may be referring to the 2013 Proxy Statement where it states:

In 2012, to create incentives for continued long term success beyond the Model S program and to further align executive pay with increases in stockholder value, the Compensation Committee reviewed Mr. Musk’s equity compensation and retained Compensia to advise in such review. Following such review, the Compensation Committee recommended to the Board of Directors a new stock option grant to Mr. Musk. On August 1, 2012, our Board of Directors approved a grant to Mr. Musk of options to purchase 5,274,901 shares of our common stock at an exercise price of $31.17 per share representing 5% of our total issued and outstanding shares as of August 13, 2012, the effective date of such grant (the “2012 CEO Grant”). The 2012 CEO Grant consists of ten equal vesting tranches, with a vesting schedule based entirely on the attainment of both operational and market capitalization milestones, as further detailed below.

Each of the ten vesting tranches requires that the Company meet a combination of an operational milestone achievement and a significant increase in our market capitalization of $4.0 billion. Since our average market capitalization for the 30 trading days prior to August 13, 2012, the date of grant, was $3.2 billion, the first tranche will only vest when we more than double our market capitalization to $7.2 billion and at least one of the operational milestones described below is met. The second tranche would vest only if there is another $4.0 billion increase in our market capitalization to $11.2 billion and when two of the operational milestones described below are met. The remaining tranches are structured in a similar manner, so that the 2012 CEO Grant would be fully vested when we achieve a market capitalization of $43.2 billion and all ten operational milestones described below have been achieved. Market capitalization for purposes of milestone achievement will be determined based on a rolling six month historic average (based on trading days only). The market capitalization for a particular trading day is equal to the closing price multiplied by outstanding shares of common stock as of the end of such trading day. To give some perspective on these targets, note that, as of April 11, 2013, Ford Motor Company and General Motors Company had market capitalizations of approximately $53 billion and $40 billion, respectively. The term of the 2012 CEO Grant is ten years, so that if any vesting tranches remain unvested after expiration of the 2012 CEO Grant, they will be forfeited. In addition, Mr. Musk will forfeit any unvested options if he is terminated as CEO of the Company, whether for cause or otherwise.

In addition to the market capitalization milestones, vesting for each of the ten tranches requires achievement of certain operational milestones. To illustrate, vesting of the first tranche requires the achievement of any one of the ten defined operational milestones, vesting of the second tranche requires the achievement of any two of the ten defined operational milestones, etc. The ten operational milestones for the 2012 CEO Grant are:

•

Successful completion of the Model X Engineering Prototype (Alpha);​

•

Successful completion of the Model X Vehicle Prototype (Beta);​

•

Completion of the first Model X Production Vehicle;​

•

Successful completion of the Gen III Engineering Prototype (Alpha);​

•

Successful completion of the Gen III Vehicle Prototype (Beta);​

•

Completion of the first Gen III Production Vehicle;​

•

Gross margin of 30% or more for four consecutive quarters;​

•

Aggregate vehicle production of 100,000 vehicles;​

•

Aggregate vehicle production of 200,000 vehicles; and​

•

Aggregate vehicle production of 300,000 vehicles.​

As of the date of this filing, no vesting milestones for the 2012 CEO Grant have been achieved and no shares subject to the 2012 CEO Grant have vested.

The 2012 CEO Grant will not accelerate in the event of a change in control of the Company. However, in a change in control event, the achievement of market capitalization-related vesting milestones for the 2012 CEO Grant will be based solely on our market capitalization as of the effectiveness of such change in control rather than the rolling six month historic average. The 2012 CEO Grant will not need to be adopted by an acquirer and, to the extent unvested on such date, will expire.

 

[mitch672]

Oh it's pretty clear what that document shows... If Teslas market capitalization where 43.2 billion, you'd be looking at a $400+ per share of TSLA, if it's valuation where similar to how it's done as of today. These are all goals to try and retain Elon, and make Tesla a major player in auto manufacturing.

 

[deonb]

anybody want to explain what this document means to us shareholders?

In short, if Elon grows the company to 10 times the valuation it is now, over the next ten years it, we will pay him $2 billion for that (5% of the stock at that time).

Good deal for Elon. Great deal for shareholders. I wish I could buy 10-year leaps.

 

[PureAmps]

Oh it's pretty clear what that document shows... If Teslas market capitalization where 43.2 billion, you'd be looking at a $400+ per share of TSLA, if it's valuation where similar to how it's done as of today. These are all goals to try and retain Elon, and make Tesla a major player in auto manufacturing.

It won't be quite that high. There will be some dilution over that time period. For example, Elon's 2009 grant is almost fully vested and if exercised would add 6.7M shares to the shares outstanding. Just that dilution alone brings the share price down to ~$350/share at $43.2 billion market cap. Add in the 2012 grant, additional employee stock based comp, and it will go even lower. Not to mention the possibility of an additional stock offering to fund Gen III. That is still an amazing valuation regardless...

I view this as a very aggressive and public statement of their corporate goals expressed as a CEO compensation package. It will be interesting to see if there is any market reaction.

 

[vgrinshpun]

Could it be that the aggressiveness of this package would be taken by cynics as an indication of impending secondary public offering and Tesla trying to sweeten the medicine? This would be the only immediate reason that I can see that announcement of this compensation package would cause a slide in stock price.

 

[30seconds]

compared to other CEO vesting grants this requires some very high aspirational goals to be met for the company. we don't see the details in this excerpt, but obviously the company and Elon are not setting the goals around Tesla becoming a small niche luxury player. I would hope that the structure of the vesting package (which I have not read) has the incentives structured so that TSLA remains at least break even/ slightly profitable during the completion of these goals.

Hopefully there is some leeway regarding near term profitability - personally I believe that the mgmt team should be given leeway if the market sees this as a high growth opportunity and pushes to a high market cap event without creation of $400-$500m annual profits. At some point the longer term returns on taking advantage of a gap in the market where you have a technological & structural edge outweighs near term profit.

hey, maybe this keeps him from going to mars

 

[Robert.Boston]

Could it be that the aggressiveness of this package would be taken by cynics as an indication of impending secondary public offering and Tesla trying to sweeten the medicine? This would be the only immediate reason that I can see that announcement of this compensation package would cause a slide in stock price.

Elon suffers more from dilution than a buy-and-hold shareholder because:

• The option quantity is a fixed number of options, rather than a % of stock outstanding, and
• These are options, not grants of shares, so the percentage reduction in the value of the options is higher than the percentage reduction in the value of shares.

That said, I cannot see how you can grow the company this aggressively without selling more equity at some point. Note, though, that current Tesla has not tapped the corporate bond market; all of the balance sheet leverage currently comes from the DoE loan (which is going away).

 

[kenliles]

That said, I cannot see how you can grow the company this aggressively without selling more equity at some point. Note, though, that current Tesla has not tapped the corporate bond market; all of the balance sheet leverage currently comes from the DoE loan (which is going away).

I agree- no way more equity isn't sold, likely corresponding to ModelX ramp(some) and GenIII(significant) and it's large production capitalization. Neither of which should be a problem if current sales and margins plans are met with S

 

[K Hall]

Stock sales are your most expensive form of financing. There are many other options available to Tesla to raise capital as Robert has hinted.
This compensation plan tied to aggressive goals is not uncommon for a public company executive. What is unconventional is the fact that the 5 year strategic plan milestones have been laid out for all to see.
With continued execution this company is a steal at $47.00 a share.
I was speaking to an economist at the Federal Reserve today about Tesla. He said "It is foolish for anyone to bet against Elon Musk." He was referring to the large short interest in the stock.
Strap your seat belts on and accumulate shares over the next 10 years. Ignore the short term movements as they are just noise in the long run. :biggrin:

 

[vgrinshpun]

This compensation plan tied to aggressive goals is not uncommon for a public company executive. What is unconventional is the fact that the 5 year strategic plan milestones have been laid out for all to see.

I thought that milestones that are part of 2012 CEO Grant have 10 year term. Could you claify where 5 year is coming from?

I am very curious about this as I believe that actual internal goal for 300,000 is pegged at 6 -7 years (starting on Aug of 2012)

 

[K Hall]

You are correct. I have never seen a 10 year strategic plan and did not review the dates. That is Far Vision. I will amend my post.