Great observation. Everyone investing in a pyramid scheme is either a predator or prey.
All the Tesla shareholders have done is agree to give a chunk of their holdings to Musk at a reduced price. They know they’re doing that, and they’re openly agreeing to do that.
No, you absolutely can. But to make it work you have to hype up the gains and downplay the bad side of it. Or just omit part of it. That’s not necessarily the same as fraud.
I’ve been in a pyramid scheme before. It was explained to me in detail how it worked. I treated it like a normal job and was chastised for it, and quit.
Basically, I was brought into a scheme that sold long distance service to people. (This was in the 90s, when such things still existed.) Theoretically the idea of the company was to sign up people for the service, which itself wasn’t too bad; it was comparable to or even a bit cheaper than most long distance services in those days. But it was totally set up as a pyramid scheme; you can make money by signing people up for the service, but the real focus was on signing people up to be salesmen under you, and hope that those people you recruited would recruit others, and so on. You got a percentage of what people under you made, and what people under them made, etc. Typical pyramid scheme stuff.
I got into it because the guy who signed me up offered to pay for all of the recruiting materials I would normally have to pay for myself (training books, videos, registration fees, all that). He was a family friend and was trying to do me a favor to help me get money. Once I signed up I focused on trying to get people to sign up for the service, but it wasn’t long before I started getting more and more pressure to recruit other salespeople. Finally I said, I thought the point of this was to sell people this long distance service which is actually pretty good (and I was myself using the service).
That was the point where I quit, because I realized that the point wasn’t to sell people a service, but rather to recruit more people. That wasn’t what I thought I was getting into.
At no point did anyone lie to me. I had all of the info early on. The only deceptive part of the situation was that they gave the impression that this was about selling people a product, and while yes there was a real product that worked and people could buy, that wasn’t what I was expected to be doing, and people wouldn’t be satisfied about me just doing that.
Theoretically I could have stuck around, getting people to sign up for the long distance service, and making what little commission that gave me. I left because I was getting badgered to do other things. Not just the guy who recruited me, but the person above him and others.
I’m just glad that I didn’t sink my own money into joining. At that point this would have been a much worse story. The only one who really lost was the guy who brought me in and paid his own money to do it.
Because I think it was a stupid move on Tesla’s part, and the Teacher Union is going to have to deal with any fallout despite the fact that they opposed the idea. Sure they can sell but there are tax implications from dumping a bunch of stock. Note that I don’t feel too sorry for them, they aren’t going to starve, worst case scenario we’re probably talking about a 10% drop in Tesla’s value, but I happen to like teachers and want them to prosper.
The same could be said for all the investors in the pyramid scheme. While there are still people buying in people are making money hand over fist, they can leave at any time, why should the government get involved?
Just the facts of this case: a single, clearly unexceptionable unqualified individual has just been paid more than twice what the company has made in profit in its entire existence, clearly indicates there is a scam a foot. It’s clearly going to end badly just as certainly as a pyramid scheme and just as clearly the ones who will end up screwed are the ones at the bottom (such as the California teachers)
That isn’t how stock valuation works. Shares that are directly held by the company are in no way “effectively co-owned by all of the other shareholders”; they are owned by the company as a ‘corporate person’ which votes in its own interest, albeit typically at the behest of the board of directors who typically also own a significant amount of stock. The value of the stock may have little connection to the realizable value of the company in terms of how much cash and real assets (real estate, equipment, facilities) it has, and is typically tied to a perception of the (perceived) expected future value of things like intellectual property, capacity for technical innovation, or anticipated sales and market growth. Stockholders don’t ‘own’ any real assets and can only access them in the case of bankruptcy or dissolution. For the company to sell or award stock to an executive dilutes corporate control of the stock but doesn’t change the value of the stock that is outstanding.
This is one reason why massive stock buy-backs and large compensation packages are controversial if legal; when the board holds significant but minority amounts of stock their fiduciary interest is in sustaining the viability of the company or otherwise looking out for the interests of the shareholders at large, but when the company they direct has a significant share of stock they are in a privileged position to direct the company to take actions which artificially amplify the stock value through various unscrupulous schemes (‘pumping’) so they can extract maximum value before ‘dumping’ the stock on unsuspecting buyers and harming existing shareholders. Similarly, a CEO or president that owns a large share of stock can have disproportionate control of the company and act in a way not in the interests of shareholders at large. This is also why a CEO should not be able to appoint board members or be too cozy with them because his or her interests may be contrary to the long term viability of the company, and acting in collusion they can collectively undermine the long term value for at-large shareholders who have little influence on corporate actions or decisions.
Stranger
That’s what I’m saying; there’s no deception going on here and everything seems to be above board.
It’s absolutely insane and if I were a shareholder, there’s no way I’d vote for it. But I’m not, and it doesn’t affect me in any way.
I actually suspect that some non trivial proportion of Tesla shareholders may be Musk fanboys or at the very least people who think he’s got some sort of extraordinary business mojo, hence the willingness to actually agree to this. But it’s their choice to make, which is the point here.
As far as the extraction of wealth from the company, I suspect it’s exactly that. Anyone who’s been watching already sees that things are about to get a lot more competitive for Tesla, as the automotive industry moves into electric vehicles in a serious fashion. They used to be competing with Rivian, Lucid, Fisker, and the other EV startups for relatively high dollar customers who want the novelty of being an early adopter. But that’s changing- as EVs quit being early adopter products, we’re seeing the big boys move in- Ford, Toyota, Honda, BMW, etc… and they’re viewing this as something of an existential change, and are treating it with the gravity that deserves, as well as the funding it deserves.
So Musk et al, see the rather grim (IMO) prospect of having to compete with the big boys in that space and having to compete with their economies of scale and production capabilities. And EVs are quickly losing their “cool” factor, and Teslas by extension are stopping being status symbols.
All of which points to pretty rocky times ahead for Tesla. That’s also probably why Musk is so noisy about self-driving vehicles being the future of Tesla; that’s a way that they can stay relevant and out ahead of having to compete with the big boys on level ground.
Except this isn’t a pyramid scheme. There are real products (cars, one of which was the best selling car of any kind in the country last year, Self driving subscriptions and software that could be licensed and teh charging network that is now opened to more than just Teslas). People aren’t trying to sell the stock as the prouct.
OK. Put your money where your mouth is and short the stock. If the stock beats the market or comes close between now and the end of the year, will you agree that it’s not a scam?
The fund is worth $330 Billion of that $850 Million is in Tesla according to my quick Google. The have done very very well on that investment so they can’t be too upset. If the entire Tesla part went completely to zero (which is not going to happen), that’s about one quarter or one percent of their holdings.
We can dispense with the won’t somebody think of the children (and the California Teacher’s Fund) argument.
All of which makes it clear that this is a heist not a legitimate renumeration for an important senior member of staff.
If this was say Sam Altman at OpenAI (as an example, not to side track this with AI/Altman talk) you could make the point that their profit up to now was a tiny fraction of what they are going to make going forward and they are at the start of exponential business growth. So you could "just* justify him being paid 2x the profit they’ve made up to this point as it’s going to look like a drop in the bucket soon. But that’s not the case for Tesla.
I’m not sure that there is a lot of distinction here.
Under the current agreement, at some point in the future Musk can ask Tesla to sell him 304 million shares at, I something like $30 a share. At that point Musk can sell those shares for a much higher price and make a bundle. He may not be able to make a full 46 billion since if he sold them all at once the market would crash, but lets say for the sake of argument he can get the full $182. So the end result is Tesla gets loses 304 million shares, gets $30x304 million in cash and Musk gets $152x304 million in cash.
Alternative option, the company decides not to go down this route, and instead decide to sell the stock for $182 a share themselves, pocket $30x304 million for the company, and divide the remaining $152x304 million among the outstanding shares which amounts to something like $15 a share. Leaving it in exactly the same shape as in the first scenario but with the stock holders $15 a share richer.
So ignoring caveats related to actual sale price of the stock, and the dubious advantage of making their CEO even more rich, this action reduced the value of the company to share holders by at least $15 a share (likely more since the board might have plans for their assets that are better than what was proposed in secario two). In a rational market that would result in at least a $15 drop in share price.
(Doo-dah, doo-dah… Will Dopers please stop posting thread titles that get stuck in my head to the tune of “Camptown Races”? 
)
[/hijack]
I just want to pop in here real quick and applaud every single person who has been participating in this thread. This is one of the most interesting and educational threads I’ve read in awhile. I’m not going to weigh in on anything regarding Elmo or Tesla because I do not understand how multi-billion dollar businesses work nor how stock options work. I am nonetheless finding this discussion eye opening. Threads like this are why I joined the dope 20 plus years ago.
I really do love you guys. Carry on.
(It doesn’t even read like a pit thread!)
This is an issue with equating stock or stock options with cash or assets. Just because a company owns Z shares of stock valued at $YYY.yy per share does not mean that that it actually has cash value in hand of Z x $YYY.yy, nor that this is some durable asset of intrinsic value. In fact, a company own a significant amount of its own stock is a substantial liability to other stockholders, both because it is theoretically less beholding to the desires of stockholders and because that represents hypothetical value that could be used to raise money to purchase or upgrade facilities, acquire capital assets, hire talent, or otherwise invest in things that would increase productivity and produce revenue. Just holding stock bears significant risk that the value might go down which reduces potential for investment, and provides no material benefit other than that the company (at behest of its principals or C-suite executives) can do things that may not be to the eventual benefit of shareholders.
‘Gifting’ stop options to an executive (or anyone else) as compensation tied to revenue or valuation criteria (or to retain critical talent) is a common practice, if suspect in how large these incentives have become for what is often paltry service or even negative performance. In the case of Tesla, since its valuation is already absurdly inflated way beyond what the company could every justify in revenue, ‘dumping’ this stock in this form is arguably a fiscally sound decision, although it control it would give to Musk or whomever he ends up selling should be highly troubling to shareholders in terms of future valuation, but because the board who are supposed to represent the general interests of shareholders-at-large are essentially Musk’s bosom buddies, and their chairsperson Robyn Denholm is Musk’s hand-picked marionette, there is little confidence in their willingness to defy whatever Musk demands, even this outrageous payout demand.
It should be evident that the stock market is no longer ‘rational’ in any sense of the word, and the valuation of Tesla has become completely decoupled to actual revenues or plausible future earnings. Offering Musk stock options from treasury stock holdings may or may not be perceived negatively but frankly the only thing that could puff up Tesla to its 2021 peak is the Musk Hype Machine, and so awarding him these options might be the most ‘rational’ decision even if Musk does absolutely nothing to improve the actual performance of company operations or products.
And if he does force the company to produce another CyberTruck-type fiasco and tank their valuation further…well, I have little sympathy for those who keep riding on a burning train. Fund investors who are supposed to be making conservative investments who continue to hold or buy Tesla stock should be removed and have their heads examined regardless of whether this deal goes through because of the improbability that Tesla stock will ever return to its previously absurd value.
Stranger
Fuck off!
(Is that better?)
The shareholders own the company, and therefore collectively own everything the company owns.
The point is that treasury stock makes the company itself a major shareholder, which is kind of wonky when you think about it.
Except that Musk and his brother recused themselves from the compensation vote, and it still passed easily.
Try walking into a company you owe shares in, demand your pound of flesh, and see how far that gets you.
A common stock shareholder owns shares of a company with a proportional vote in certain things like who gets elected to the board, employment and compensation of C-suite executives, and maybe some high level legal decisions regarding the corporate charter and disposition of ‘treasury’ capital and cash. They don’t “own” a company like you own a house or a car, do not have direct control over decisions made within the purview of the executive management. And the typical shareholder does not vote and would not have any influence if they did unless they happen to acquire a substantial amount of shares or influence enough shareholders to overrule opposing board members, i.e. in a ‘hostile takeover’ scenario.
Because, again, Robyn Denholm and the Tesla board of directors were hand-picked by Musk to favor him. The governance of the board is essentially an oligarchy that owes fealty to Elon, and fuck the common shareholders if they have a problem with that. Which is just another reason why people should divest their inadvisable holdings in Tesla.
Stranger
Irrelevant. The shareholders that voted knew what they were voting for, now if not before. And the result was still strongly in favor.
We won’t know until they file the 8-K exactly what the results were, but the preliminary results indicate very strong retail investor support and mixed but probably still favorable institutional support.
This is just completely divorced from reality. The shareholders were asked, twice now, what they wanted. And they voted strongly in favor both times (though once should have been enough).
Really it should be the institutional results that should be downplayed. People that dumped their money into Vanguard or wherever didn’t get to vote their TSLA shares, even though it’s likely they’d be more aligned with the pure retail results.
The problems occur when a majority of voting shares are controlled by one unethical entity or a small number of like-minded entities or individuals who may be intent on asset stripping or other predatory practices that serve only to enrich themselves. This is often seen when unethical private equity firms take over a public company. Ordinary shareholders deserve to be protected against blatant theft of their investments.
I agree that the Musk’s behavior was lawful and agree that this isn’t a scam, but the Tesla bubble can continue pretty much indefinitely until it doesn’t.
I haven’t done a valuation exercise, but let’s say that Tesla is priced above its intrinsic value. During the memestock bubble (the old one, not the ongoing one) Matt Levine of Bloomberg recognized that while the stock market had a mechanism to bring prices up to intrinsic value [1], there was no mechanism guaranteeing that an overvalued stock would fall to earth. I mean if baseball cards, postage stamps, and other collectibles trade above their future stream of cash flows (i.e price>zero), why shouldn’t Tesla or Gamestop or AMC do the same? Yes, stocks can be shorted (if they are available to be borrowed) and options can be traded, but that’s just a countervailing force: there’s no guarantee that the price will settle out properly. P=future value of cash flows is a convention, not a law.
Brad DeLong discusses this newishly discovered absurdity:
“Dogecoin is just “if we buy this thing it will go up, so let’s buy it; also it will be fun and Elon Musk tweeted about it.” Look, I understand that I have gotten stupider by typing all of that, and you have gotten stupider by reading it, but it’s gonna get worse.”
DeLong also discusses the pay deal in the OP (registration required).
DeLong admires Musk more than the message board generally does:
Before the pay package, Musk was a run-of-the-mill Silicon Valley billionaire, though perhaps the most consequential one. He is clearly an effective fundraiser, cheerleader, and occasional coach for engineers working on battery technologies, electric vehicles, and rocket science. Without him, those technologies would not have been pushed forward as much as they have. Though he is notorious for over-promising, Musk over-delivered in these cases. When the history of humanity’s effort to tackle climate change is written, the Musk of the 2010s will surely be one of the biggest heroes.
But here’s the thing. These big options packages create incentives for the CEO to manage the memestock rather than the underlying value of the company. Memestocks run on gimmicks (Twitter rebranded to X! Cybertruck!) rather than the grind of meeting with suppliers, keeping your workers happy enough, or designing an economical car that will sell like hotcakes, the electric version of the Honda Accord or the Toyoya Corolla.
80% of Tesla’s revenues come from automotive sales. So what does Musk chat about during his last earnings call? Intangibles directed at boosting share prices, rather than the underlying value of the company. Musk, from the DeLong link:
“We should be thought of as an AI or robotics company. If you value Tesla as just like an auto company, you just have to – fundamentally, it’s just the wrong framework … the way to think of Tesla is almost entirely in terms of solving autonomy and being able to turn on that autonomy for a gigantic fleet. And I think it might be the biggest asset value appreciation history when that day happens when you can do unsupervised full self-driving.”
So over the long run it turns out that market rationality implies P >= the future value of cash flows. Buckle up folks, it’s going to get wild.
ETA:
Lynn Stout made this point in her book The Shareholder Value Myth. Article-length treatment: https://scholarship.law.cornell.edu/cgi/viewcontent.cgi?article=2311&context=facpub
Others have made it as well. Heck, in all nations throughout history, ownership of a house has been encumbered with all manner of legal restrictions that don’t apply to goods commonly owned. Property is basically a form of contract which can be complicated in practice when the property is assembled in large chunks.
[1] If P<future value of cash flows, somebody can buy the company out and take it private. Provided they can handle some arduous calculations and scenario comparisons. IOW provided somebody has invented spreadsheet software.