Tesla boss Musk asks community to sell shares
Tax liability would have made the sale of shares necessary anyway
Borrowing from stocks as the only other option
23 percent of Tesla shares are in the hands of CEO Elon Musk. He now wanted to throw ten percent of his stake on the market – at the request of his Twitter followers. The billionaire asked them on the platform whether he should part with Tesla shares, because although he is the richest person in the world on paper, he only becomes taxable through the sale of the papers, because he receives a salary as Tesla boss doesn’t. The result was clear: of the 3.5 million survey participants, significantly more than half decided that Musk should sell Tesla shares:
Much is made lately of unrealized gains being a means of tax avoidance, so I propose selling 10% of my Tesla stock.
Do you support this?
– Elon Musk (@elonmusk) November 6, 2021
The company director promised that he would stick to this vote. And indeed, Musk kept his word: Between Monday and Wednesday of this week, Musks redeemed almost 3.6 million shares worth around four billion dollars in his first share sale since 2016 trust company, according to a mandatory notification to the US stock exchange regulator. He also sold an additional 934,000 shares for $ 1.1 billion. The 4.5 million shares correspond to about three percent of his shares in the electric vehicle manufacturer.
But a closer look at the circumstances shows: Elon Musk would have had to part with a large block of shares anyway – he only got the legitimation of the community through the survey on Twitter. The SEC announcement shows that at least the current sale was planned more than two months before the vote.
$ 15 billion in tax liability due
Because already in September Musk had hinted that a sale of Tesla shares was necessary because he wanted to use the proceeds to pay taxes on stock options that were due. At the Code Conference he said, “I have a lot of options that will expire at the beginning of next year. So I will have to sell a large number of my options in the fourth quarter or they will expire”.
In fact, the Tesla boss has a tax bill in the amount of 15 billion US dollars in front of his chest in the coming months, as CNBC calculates. An agreement made with the electric car maker in 2012 stipulates that Musk will be paid in shares and options, but will not receive any salary for his work at the top of the company. Musk can acquire a total of 22.8 million shares at a price of US $ 6.24 per share – a Tesla share currently costs well over US $ 1,000. In order to be able to redeem some of the options, taxes are due on the profits made, the CNBC at 54 percent, a total of around 15 billion US dollars.
Musk is tied to certain time windows when selling shares
Elon Musk had already sold Tesla shares in the past in order to pay taxes, so the move did not surprise observers against this background. Meanwhile, the timing was interesting, because Elon Musk only has fixed time windows in which he can part with Tesla shares. Since the first options expire at the start of 2022, it was already expected that some of the Musk Tesla shares would hit the market in the fourth quarter. Meanwhile, it was not to be expected that Musk would part with the complete 10 percent package at once, as this would have weighed too heavily on Tesla shares.
Musk has only one alternative to selling stocks
In order to exercise the stock options and at the same time pay his tax debt, Elon Musk only has one other option to sell shares: he could borrow additional debt by borrowing on shares. He has already done this several times in the past, according to press reports, the Tesla boss is said to have loaned 92 million shares. In this way, he was able to raise cash without having to part with Tesla shares.
This becomes problematic, however, when the Tesla share goes into decline and loses value. Musk himself pointed this out at the “Code Conference”: “Stocks don’t always rise, they also fall”. Against this background, a share sale at a currently high price level would be the more worthwhile alternative for Musk, because it avoids possible price fluctuations in the future.
The fact that Musk is selling Tesla shares in order to exercise stock options and be able to tax the profits generated is likely to be an even more frequent issue in the future. In 2018, Musk extended his contract as Tesla CEO by 10 years and again waived a salary and agreed to be paid in stock options depending on the achievement of certain corporate goals.
At times, Tesla shares on the NASDAQ climbed 1.18 percent to $ 1,080.30.
Finanzen.net / Reuters editors
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