Elon Musk, Tech's Cash-Poor Billionaire

Elon Musk, Tech's Cash-Poor Billionaire

The Tesla CEO is worth $39 billion on paper, but the electric-car maker, who announced he's selling his houses and most of his worldly possessions, needs a wad of money to exercise his latest payout

Elon Musk at a ceremony in January for Tesla's new China factory in Shanghai. REUTERS
Elon Musk at a ceremony in January for Tesla's new China factory in Shanghai. REUTERS

On the cusp of a stock-option grant that promises to make him nearly $1 billion richer, at least on paper, Elon Musk made a surprising announcement.

"I am selling almost all physical possessions," the Tesla Inc. chief executive tweeted on May 1. "Will own no house."

Mr. Musk has since listed three of his California mansions for sale with asking prices totaling $75 million. In emails on May 7, he told The Wall Street Journal that he also plans to unload four other houses in the Los Angeles neighborhood of Bel-Air. Once they are sold, he said, he wasn't sure "where I will stay yet, but will probably rent a small house somewhere."

The new burst of public intrigue follows a relative lull for the longtime Twitter maverick. Since the start of the Covid-19 pandemic, he has blasted authorities over shelter-in-place rules, talked down Tesla's stock price and announced the birth of a son with experimental-pop star Claire Boucher, known as Grimes. They named their child X Æ A-12 Musk, referencing both a favorite song and a military jet, among other eponyms.

Mr. Musk's decision to liquidate renews attention on his perplexing personal finances--a multibillionaire who in past years has claimed he was cash poor, according to court records.

His holdings in Tesla, his rocket company Space Exploration Technologies Corp., or SpaceX, and other assets give the 48-year-old a net worth estimated by Forbes at $39 billion.

Yet he has to borrow, sometimes a lot, to pay for his lifestyle and business investments without liquidating shares that help him maintain control of the companies he runs. About half his Tesla stock is pledged as collateral for personal loans, an April 28 financial filing shows. Maintaining his equity stake--about 20%, or around $28 billion at Friday's valuation--is important for him to keep control over the Silicon Valley auto maker.

Mr. Musk accepts no salary at Tesla. His compensation package entitles him to stock awards potentially worth more than $50 billion if the company passes certain milestones by 2028. This past week, he became eligible for the first of 12 tranches of the stock options because Tesla's market value had remained above $100 billion for a specified amount of time. To secure the payout of 1.69 million shares, worth more than $1 billion, Mr. Musk would need about $592 million to exercise the option without having to sell the stock.

In the email exchange with the Journal, Mr. Musk said he wasn't selling his possessions because he needs the money: "I'm trying to make my life as simple as possible right now, so will only keep things that have sentimental value."

Mr. Musk's vision for Tesla and the future of electric and driverless cars has helped stoke investor enthusiasm, driving shares to record heights this year and making it the world's second-largest auto maker by market value behind Toyota Motor Corp.

His personal finances nonetheless matter to Tesla investors because his borrowing against shares creates a risk that is hard to quantify. If Tesla stocks fall below a certain level, financial institutions can call in the loans unless Mr. Musk makes up the difference. The fear is if it leads him to unload a large number of Tesla shares.

"If he is forced to liquidate it, the downward pressure on the stock would be tremendous," said Charles Elson, a University of Delaware professor and a corporate governance expert.

Figuring out when Mr. Musk would have to sell has spurred intense speculation among Tesla short sellers--investors who have bet heavily that the electric-car maker is overvalued and who would profit if shares drop. They anticipate that such a margin call could crush the company.

Tesla has warned investors in regulatory filings about the risk. "If the price of our common stock were to decline substantially and Mr. Musk were unable to avoid a sale of the pledged shares (for example, by contributing additional collateral or reducing his leverage), Mr. Musk may be forced by one or more of the banking institutions to sell shares of Tesla common stock under the terms of his loans. Any such sales could cause the price of our common stock to decline," the company said in a February filing.

At the moment, such concerns are hypothetical: Tesla's shares have surged. The stock is up 96% this year through Friday, even as the markets have been roiled by concerns about a global recession from the Covid-19 pandemic. Analysts still expect Tesla to mark its first annual profit in 2020, according to FactSet.

On stage

Tesla investors are accustomed to turbulence from Mr. Musk, often coming from his Twitter account, including his disastrous 2018 tweet saying he had secured funding to take Tesla private.

Last year, Mr. Musk seemed more focused on sending astronauts to space and rushing to open a car factory in China. He has since returned to public provocation in time for the pandemic.

Mr. Musk pushed to keep open Tesla's lone U.S. factory, near San Francisco, when government officials ordered it closed. The company finally stopped production on March 23. He engaged in a Twitter battle with critics over whether machines he donated to hospitals qualify as proper ventilators. When local authorities last week said they would extend shelter-in-place orders, Mr. Musk likened such policies to fascism.

He told workers late this week that the factory would resume production. The local health department overruled him and in a statement Friday said the auto maker "must not reopen" yet.

He stepped up commentary on his personal life. When he disclosed plans to sell his possessions, he noted on Twitter that Ms. Boucher was angry with him. He also had a back-and-forth about their baby's name, X Æ A-12 Musk.

After Ms. Boucher tweeted an explanation--X is "the unknown variable," she wrote, while Æ is "my elven spelling of Ai (love &/or Artificial intelligence)," and "A-12 = precursor to SR-17 (our favorite aircraft)" plus "Archangel, my favorite song"--Mr. Musk corrected her. The jet was the SR-71, a U.S. reconnaissance plane better known as the Blackbird, he tweeted.

The couple also disagreed over how it is pronounced. Ms. Boucher wrote on Instagram that it was "just X, like the letter X. Then A.I. Like how you said the letter A then I." Mr. Musk in a podcast this week pronounced it x-ash-a-12.

Asked over Twitter about selling his belongings, Mr. Musk said: "Don't need the cash. Devoting myself to Mars and Earth. Possession just weigh you down."

He set rules about the sale of one of the properties, a 2,756-square-foot Bel-Air house once owned by the late comedian Gene Wilder and listed for $9.5 million. "It cannot be torn down or lose any [of] its soul," he wrote.

Mr. Musk also listed a 16,251 square-foot mansion Bel-Air that he acquired in 2012, and, on Tuesday, a 47-acre estate with a century-old mansion with views of the San Francisco Bay, known as de Guigne Court. He bought it in 2017 for $23.4 million.

"This is very much a personal choice and not something I would advocate broadly," Mr. Musk told the Journal. "If someone wants to have or build a great house and that makes them happy, I think that is totally cool."

While possessions are disposable, Mr. Musk doesn't like selling stock, though he has sold some to cover taxes on past stock options. He told the Journal in 2016 that he planned to never sell his Tesla shares. And, in fact, he has since bought more.

That reluctance to part with shares gets at why he has been cash poor. Selling shares would weaken his control over Tesla. Unlike the founders at Facebook and Google, Mr. Musk lacks a dual-class of stock ownership that gives them supervoting power over common shareholders. Such a structure wasn't common when Tesla went public in 2010.

Instead, Mr. Musk relies on Tesla rules requiring a supermajority vote for major corporate changes. Given his roughly 20% stake, that means he can effectively veto a takeover attempt or other unwanted measure.

The milestones set in Mr. Musk's compensation are designed to encourage him to pursue long-term goals. Yet his ability to borrow large sums against significant numbers of shares provides a motive for him to think about day-to-day stock movements: Falling share prices could trigger margin calls.

"There is a lot of short-term incentive for the founder to pump up the price of the stock," said Andy Challenger, senior vice president at outplacement firm Challenger, Gray & Christmas.

'Financially illiquid'

Mr. Musk has never disclosed the terms of the loans. In the past, he has said the shares only represent a small percentage of his fortune and that he could pledge more shares if needed. Yet his borrowing has increased, fueling questions over how he plans to repay.

"At some point it gets paid back," Mr. Elson said this week. "That's the conundrum."

Mr. Musk has pledged 54% of his Tesla shares, worth about $15 billion on Friday, as collateral on loans at the end of last year, according to the April 28 filing. That compares with 40% a year earlier. How much, if any, of Mr. Musk's shares of SpaceX are pledged is unknown, though court records indicated he has used some of those shares as collateral in the past.

Tesla's board has capped how much Mr. Musk can borrow at 25% of the value of whatever shares he pledges as collateral.

As of February, Mr. Musk had outstanding loans that totaled $548 million through credit lines from Morgan Stanley, Goldman Sachs Group Inc. and Bank of America Corp., according to regulatory filings disclosing his relationship with banks that serve Tesla. His total borrowing from all sources couldn't be learned. Mr. Musk didn't respond to questions about this personal debt.

Before Tesla went public, Mr. Musk told a judge during a contentious divorce with his first wife that he had run out of cash and had taken on emergency loans from friends to support his family and pay living expenses.

Mr. Musk told the judge that his net worth was largely tied up in Tesla, SpaceX and SolarCity, an energy company that he oversaw as chairman. "I have no other investments that I could easily sell in order to generate money," Mr. Musk said in a court declaration at the time. "My cash position is very limited. About four months ago, I ran out of cash entirely."

Mr. Musk noted in the court record that while he owned a private jet, the airplane market at the time was depressed. "If it were sold," he said, "it would likely have to be at a fire sale price."

In 2016, as Mr. Musk was trying to persuade investors to approve his plans to have Tesla acquire a struggling SolarCity, his brother, Kimbal Musk, had faced margin calls on loans tied to SolarCity stock he owned, according to court records. The younger Mr. Musk, who was trying to expand his restaurant business, pressed his older brother for a loan, and was rebuffed.

"You do know that I don't actually have cash, right?" Mr. Musk told his younger brother, according to court records. "I have to borrow."

Last year, Mr. Musk's ability to access cash came up again during a defamation lawsuit over comments he made about a man involved in the rescue of a Thai soccer team from a flooded cave in 2018. A lawyer in the case said in a filing that Mr. Musk had described himself as "financially illiquid."

According to a regulatory filing, Mr. Musk has two ways to use his stock options. One involves paying $350.02 for each share, which closed Friday at $819.42. Another choice is to exercise the options and simultaneously sell shares to pay the $350.02 per-share strike price and any taxes. That doesn't require cash up front, but would leave him with fewer shares.

Mr. Musk's vesting milestone has drawn attention since January, when Tesla reached a $100 billion market value. He has until Jan. 20, 2028 to exercise his stock options, as long as he remains an employee of the company, and, if he leaves, within a year. He holds several million stock options from previous awards yet to be exercised.

As Mr. Musk pushed to reopen the California car factory and described the government's pandemic response as overblown, he has been accused of acting like an irresponsible billionaire.

Mr. Musk said in a podcast interview with Joe Rogan that aired Thursday that having possessions opened him up to attacks on his character.

People seem to conflate spending with creating money in successful businesses, he said: "In recent years, billionaire has become…a pejorative, like that's a bad thing, which I don't think makes a lot of sense in most cases."

Nancy Keates contributed to this article.



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