The Advisors' Blog

I blogged on Monday about accounting values for stock options. Now, we have an interesting example of accounting values for restricted stock!

As you’ve probably read, Tesla announced a big restricted stock grant to Elon Musk – valued at about $30 billion – in order to make up for the 2018 option award that he’s continuing to appeal and because “retaining Elon is more important than ever before” in light of today’s AI talent war and Tesla’s opportunities. Those reasons are all described in this letter to shareholders.

Even though the award is a grant of restricted stock, it requires Elon to pay a “purchase price” upon vesting that is equal to the exercise price per share of his 2018 award (that “moonshot” award had been subject to performance conditions that were achieved). As far as the new grant, it says there’s no “double dipping” if he ends up being entitled to his original 2018 award. Other than that, there are no performance conditions besides staying employed until the vesting date, which is two years away.

Which leads us to the accounting consequences. Tesla says the award is unlikely to ever vest – and therefore worth $0 from an accounting perspective. From the 8-K:

The Company expects to account for the 2025 CEO Interim Award as a grant of restricted stock with a performance condition in accordance with ASC Topic 718, which for purposes of the 2025 CEO Interim Award is based upon the probability of certain conditions being met. Restricted stock with a performance condition is accounted for by recognizing compensation expense over the requisite service period, based on the accounting grant-date fair value, but only if and when the vesting of the award becomes probable. . . .

As of the date of this report, the Company expects that the performance condition of the 2025 CEO Interim Award will not be deemed to be probable of being met. As a result, the Company currently expects that it will not recognize a compensation expense upon the issuance of the award. However, the Company will reassess the probability of the performance condition being met at least quarterly….

The Company is unable to predict whether a compensation expense will be recognized at any time during the two-year requisite service period, or thereafter.

For illustrative purposes only, if the approvals had been obtained on August 1, 2025, based on the closing stock price on such date, the accounting grant-date fair value of the 2025 CEO Interim Award would have been approximately $23.7 billion. This amount is based on such assumptions and is provided only for illustrative purposes. It does not reflect the accounting grant-date fair value of the 2025 CEO Interim Award that will be calculated in the future and disclosed in the Company’s future financial statements, nor is it indicative of the timing of recognizing any compensation expenses.

It is fascinating to think about the analysis that led to the $0 accounting value. I assume it’s that the company believes it has a strong case about the 2018 options being reinstated and not that it expects Elon to leave before the vesting date.

There are of course other interesting aspects to this award and the approval process. The Financial Times pointed out that this is an interim award – the board is continuing to work on a longer-term compensation strategy that will be submitted to shareholders at the company’s November 6th meeting. (I blogged about that timing on The Proxy Season Blog over on TheCorporateCounsel.net).

The FT also low-key criticizes that the award was recommended by a special committee of 2 directors and then approved by the board. Delaware courts had obviously looked closely at the processes and disclosures for the earlier award, but now that Tesla is redomiciled in Texas, they don’t have to worry as much about shareholder suits.

– Liz Dunshee