Splitting Tesla, Transitioning Shares, Updating The Board — #TeslaPrivate Possibilities

Today’s blog post from Tesla CEO & Chairman Elon Musk confirmed my WAG about the cost of going private. It is somewhere between $0 and $24 billion. For both amounts, Elon can get the funding secured. But for the amount of $???, it is a bit harder. Investors want to know how much they are going to invest, and how much influence they are going to get for that amount.

Tesla stock Say Elon can find 3 or 4 investors who are each willing to supply the funds to buy up to 10% of Tesla (or a bit more). Each of them likely expects to get a seat on the board of directors. Should they also get that seat when their investment is less than 1%? Or should they be on a special supervisory committee?

The way Elon wants to do this, respecting the rights of current shareholders’ first choice, can make this harder than most such deals. Normally, the strategy is focused on how to screw the current shareholders for maximum profit.

I have no doubt that Elon can find a way to secure the funds needed. He can promise that these investors will get at least 5% of Tesla each. If not enough shareholders offer their shares for $420 to this group, they will be able to buy brand new shares for that price. This could cause serious dilution, but at a great benefit to the balance sheet. This will create a few new shareholders, with a stake of 5–10% and an outsized influence.

For the largest ~20 shareholders, there should be no problem following Tesla as private company (provisions against owning a stake in a private company will be dealt with later). The rest of the institutional investors, the retail investors, the employee shareholders, and those having Tesla in a retirement plans need to be offered an alternative tailored to their needs.

What to offer the rest of these shareholders? There are a large number of constructs that can be created — all types of mutual funds, holding companies, trusts, and foundations. I have no doubt that the lawyers of Tesla can find appropriate legal constructs. But that is not what is important in my eyes.

These are different types of shareholders. They should be offered different kind of options. I once worked for a company that intended to go public after a few years. It dropped 20% of its stock in a foundation (the foundation borrowed the money from the company to buy the company stock, to be precise) and the employees earned every year a number of options on these shares. Lawyers can explain the complex pro and cons of this construct, but it payed the mortgage of many employees.

The point is that employees are a special kind of shareholders. They need the liquidity since it is their normal income and they need it to pay the rent. The employee mutual fund would be seen as one medium-sized shareholder. It should have a representation with a focus on employee interests — not UAW, but an independent director/spokesperson trusted by employees and the company. I think of someone like Robert Reich (former secretary of DOL, knows labor relations) or perhaps Jennifer Granholm (former governor of Michigan, knows the car industry and workers). These two are probably too prominent, but it illustrates my thinking.

The small institutional investors in Tesla, and those larger ones that are not allowed to invest in private companies and would like to use a loophole, also need a vehicle of their own — a vehicle listed at a stock exchange that will provide reasonable liquidity and circumvent the “no private company provision.” Creating this one should be easy for these people.

The interests of the common retail investors are diverse. Probably a general purpose type mutual fund would suffice. Someone like Galileo Russell or one of the trusted stars of the Tesla investor forums, as their investment manager and representative to the board.

For those who have Tesla in their retirement piggy banks, the fund must be tailored to certain IRS requirements. All I know about this is that it is a topic of great concern to many. But I can’t imagine that there is not a very neat solution for this.

To these solutions, there is a cost. Tesla should start to pay a very tiny dividend to cover the costs of these constructs. Joining these funds should be quite straightforward. You simply convert your Tesla shares to shares in these funds — 1:1 is the most logical way to do it.

And they all should remember the KISS principle. If you start thinking from first principles about what is needed, the solution should present itself.

To handle matters such as the above, Musk and Tesla have shared who they’re now working with to find solutions. Below are a couple of tweets followed by the full blog post linked from the first tweet.