Elon Musk holds so much power at SpaceX that it is nearly impossible to fire him or make other significant corporate changes without his support.
That isn’t going to change for investors in the company’s initial public offering.
Musk will have a nearly unprecedented level of control at a public company of its valuation, which is expected to reach at least $1.5 trillion. The SpaceX founder, who serves as chairman, chief executive and chief technical officer, controls roughly 85% of the voting power at the satellite builder, rocket-launch provider and AI developer.
The structure remedies some of the frustrations Musk has faced running Tesla. In its 16 years on Wall Street, the electric-vehicle maker has been a lightning rod for shareholder lawsuits and activist calls for Musk’s dismissal. The executive has complained, at times, that he dislikes running a public company.
SpaceX’s ownership structure gives different rights to various groups of investors. Retail investors will be able to buy class A shares, which have just one vote apiece. Meanwhile, class B shares carry 10 votes for each share owned, according to a securities filing Wednesday. Musk holds around 94% of class B shares.
Google and Facebook both put in place supervoting shares before they went public, granting their founders a level of outsized control. In both cases, shareholders had other ways to take action: they could sue in state court in Delaware, where the companies were incorporated, or sell their shares.
In the case of SpaceX, there are restrictions that could make it virtually impossible for most shareholders to sue the company. The first is a provision allowed under the state law of Texas, where SpaceX is legally based, which prevents lawsuits from shareholders collectively representing less than 3% of the stock issued. The second is an arbitration requirement that restricts investors from banding together to file class-action suits.
“They’re essentially closing off every possible avenue for shareholders to have any influence at all,” said Ann Lipton, a law professor at the University of Colorado, Boulder.
“Mr. Musk has been, and continues to be, a driving force behind our growth, innovation, and operational success,” the company wrote in its investor prospectus.
Class issues
When Tesla went public in 2010, it issued a single class of stock with one vote per share owned. That structure has led to colorful campaigns to sway institutional and retail shareholders alike during the company’s annual meetings.
Tesla also has faced lawsuits brought by shareholders, including one with just nine shares who sued and won a case to cancel Musk’s 2018 pay package. The chief executive’s pay package was reinstated on appeal late last year. The automaker later redomiciled in Texas and issued new rules that limited lawsuits to major shareholders.
Last year, Musk made the case that he needed more voting control at the automaker to feel comfortable building out its artificial-intelligence capabilities. Otherwise, he said, he feared the takeover of the company by activist investors.
“I think my control over Tesla should be enough to ensure that it goes in a good direction, but not so much control that I can’t be thrown out if I go crazy,” he said on Tesla’s July earnings call.
He said that the company studied creating supervoting authority but found that the only way to increase his control was to issue him more stock.
Then, six months ago, he got what he asked for. Tesla shareholders approved a new pay package for Musk that could ultimately be worth more than $1 trillion. The package requires Tesla to hit certain targets, including sales of humanoid robots and substantial growth in its network of autonomous vehicles.
Insider control
Compensation packages outlined in the SpaceX prospectus show Musk has been granted 1.3 billion in class B shares that will vest if he hits a series of transformative market-cap goals, colonizes the planet Mars and builds data centers in space. SpaceX described the performance goals as “improbable.”
Still, Musk can already vote those shares, which contribute to his 85% control, and take loans out against them if the board approves. While he can’t sell his supervoting shares, he can pass vested shares and their voting power to family members, including his children.
If SpaceX went public today, Musk would have more voting power than any other individual at an S&P 500 tech company, according to the data firm Equilar. Investors have mixed feelings about the structure. Some existing investors don’t mind giving Musk outsized control because they want their financial interests aligned with his.
Still, the SpaceX structure has drawn concern from corporate-governance experts.
In a recent paper, the academics Lucian Bebchuk and Kobi Kastiel argued that the governance structure could hurt SpaceX’s value in the long run since Musk can sell down his financial stake while maintaining significant control over the company.
“Even fully accepting that Musk is currently by far the best person to have at the helm, this might not be the case forever,” Bebchuk and Kastiel wrote on the Harvard Law blog.
The matter of control came up in Musk’s recent court case against OpenAI. Musk sued the AI startup arguing that it robbed a charity by converting into a for-profit after Musk donated $38 million.
When he was asked about his Tesla pay package on the stand, Musk said he wanted more control at Tesla to prevent a situation like the one in the movie “The Terminator” in which artificial intelligence is used for nefarious ends.
“A worst case situation would be that AI kills us all, I suppose,” he said.
In turn, the OpenAI executives Sam Altman and Greg Brockman testified that Musk was motivated by control in his dealings with the AI company, too. The executives said that they negotiated with Musk to give him equity in a for-profit version of OpenAI, but that he said he would only accept it if he had control over the company.
On Monday, a jury threw out the case, finding it was outside the statute of limitations. Musk said he would appeal.
News Corp, owner of The Wall Street Journal, has a content-licensing partnership with OpenAI.
