Elon Musk's Tax Bill Wasn't a Surprise; We Just Weren't Paying Attention

By Vieje Piauwasdy, director of Equity Strategy at Secfi

The numerous stories about Elon Musk’s huge stock sale have all managed to miss a critical point — almost all of this was avoidable. As recently as December 2019, Musk could have purchased his stock options for $1 billion. With a bit of diligent planning starting in 2014, he could have picked up his stock options for as little as $600 million.

For reasons unknown, he failed to exercise his stock options earlier, and instead saw his tax liability rise 10x since the start of 2020. Musk’s last-minute scramble to sell billions of dollars of Tesla equity caused the company’s share price to swing by as much as 20 percent the week he unveiled a Twitter poll asking his followers if he should offload his stock on the open market. He’s sold an estimated $8.8 billion in stock so far.

As I reflect on Musk’s stock options saga, I think there are two big takeaways. First, journalists covering Tesla didn’t see this story coming, and probably should have started covering it 18 months ago. Business and technology reporters can use this example to change the way they report on executive compensation packages. Second, a lot of people make similar stock options tax mistakes. If you’re working at a startup and you’re earning stock options, you might very well be making the same mistakes right now. Let’s unpack the first takeaway a bit more. 

It costs money to exercise stock, so the big bill shouldn’t have been a surprise

For years, business reporters who covered Musk’s generous stock options compensation package described it in positive terms — “Musk was paid about $11 billion last year … all in Tesla stock options awarded to him as part of an audacious compensation plan he inked with the electric carmaker in 2018,” one article from a prominent business magazine read in May.

“Musk’s cost to acquire the options is $3.5 billion, giving him an immediate profit of about $32 billion,” another business news site reported.

Until very recently, these articles all managed to miss a crucial point: With every new 52-week high that Tesla experienced, Musk’s stock options tax liability grew. The total cost to exercise his original performance award grew from $1 billion in early 2020, to $10 billion by mid-2021. This problem was compounded by Musk’s repeated insistence that he didn’t plan to sell his equity in the company. This should have raised questions such as, “How do you plan to pay for your shares, and why did you wait so long to exercise your stock options?”

In general, business reporters can do a better job reframing how they cover stock options and executive compensation. For many executives, stock options can cost millions of dollars to unlock, and poor timing can potentially impact a company’s share price. In Musk’s case, those critical questions came too late.

Most startup employees make the costly choice of inaction

Second, Musk’s stock options mistake is not unique. Every day, we talk to very smart people who have no idea that their tax liability rises as the value of their startup grows. Our average customer is a startup employee or founder who spent years quietly accumulating hundreds of thousands of stock options, and had no idea that their tax liability has been growing with every new round of funding that their company closed. 

When they eventually decide to exercise their stock options, they face tax bills that can be orders of magnitude higher than their base exercise costs — just like Musk. And still, this story is not yet over.

Musk has already unlocked several new tranches of stock options that he was awarded as part of his 2018 performance plan. If he again waits to exercise his stock options (like he did with his 2012 plan), he could potentially owe tens of billions of dollars in avoidable taxes within the next decade. Tesla’s shareholders — and the many reporters who cover the company — should be asking Musk if he plans to make the same decisions with his stock options this time around. And if he does, will we be surprised with the eventual outcome?

Vieje Piauwasdy is the director of Equity Strategy at Secfi, an equity planning platform for startup executives and employees.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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