Another day, another Elon Musk tweet that moves markets and causes controversy.
This time, it was his decision to float the idea of taking Tesla private, via a 9-word social media post in the middle of the trading day.
Am considering taking Tesla private at $420. Funding secured.-- Elon Musk (@elonmusk) August 7, 2018
Boom. Tesla's stock price jumped, and even though the company suspended trading for a while soon after (more on that in a second), it was up about 11 percent on the day. Eventually, Tesla followed up with a longer statement (reprinted below), which it says was first sent to all employees as an email.
In the email, Musk says he's serious about considering the idea of going private, for three main reasons:
- Stock price volatility. "As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla, all of whom are shareholders."
- Short term-ism. "Being public also subjects us to the quarterly earnings cycle that puts enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term."
- The target on his back. "Finally, as the most shorted stock in the history of the stock market, being public means that there are large numbers of people who have the incentive to attack the company."
Now, his tweet invited speculation that Musk had violated SEC regulations simply by offering it--which is probably even more incentive for him to want to go private. Doing so might be the best solution if he's serious--perhaps not permanently, but at least in the medium term, much like Michael Dell did with his eponymous company.
But set aside Tesla's ultimate future. Musk's tweet summarized in just a few short words the most important, fundamental conflict that every successful entrepreneur has to sort out.
That question is: Do they want to rule, or be rich?
Musk already is rich (an estimated $22 billion or so), but the question still persists for him. Is he still willing to cede control and answer to investors as the CEO of a public company--including answering to a market that values short-term gains?
Or does he truly think that he knows best, and that Tesla's best chance to achieve the great goals he's set out for it, is for him to lead without having to worry about what the markets think?
Noam Wasserman, a professor at the USC Marshall School of Business, wrote about this very issue a few years back in his book, The Founder's Dilemmas. He points out that only 25 percent of companies that go public still have their founding CEO in place on the day of their IPO.
And, he suggests that's a good thing--because the kind of founder who can start a company and build its early products is rarely the same kind of leader who can thrive at the head of a big public company.
But, it's going public, or else being acquired by a larger company that might itself be public, that usually leads founders to great wealth. So, it comes down to that key question.
Did you start your company because you want to run it, or did you start it because you want to get rich?
The longer email Musk sent to employees further explaining his thoughts about taking the company private lays all of this out. It's interesting reading, and I've included it below. (The original is here.)
Taking Tesla Private
August 7, 2018
The following email was sent to Tesla employees today:
Earlier today, I announced that I'm considering taking Tesla private at a price of $420/share. I wanted to let you know my rationale for this, and why I think this is the best path forward.
First, a final decision has not yet been made, but the reason for doing this is all about creating the environment for Tesla to operate best. As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla, all of whom are shareholders. Being public also subjects us to the quarterly earnings cycle that puts enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term. Finally, as the most shorted stock in the history of the stock market, being public means that there are large numbers of people who have the incentive to attack the company.
I fundamentally believe that we are at our best when everyone is focused on executing, when we can remain focused on our long-term mission, and when there are not perverse incentives for people to try to harm what we're all trying to achieve.
This is especially true for a company like Tesla that has a long-term, forward-looking mission. SpaceX is a perfect example: it is far more operationally efficient, and that is largely due to the fact that it is privately held. This is not to say that it will make sense for Tesla to be private over the long-term. In the future, once Tesla enters a phase of slower, more predictable growth, it will likely make sense to return to the public markets.
Here's what I envision being private would mean for all shareholders, including all of our employees.
First, I would like to structure this so that all shareholders have a choice. Either they can stay investors in a private Tesla or they can be bought out at $420 per share, which is a 20% premium over the stock price following our Q2 earnings call (which had already increased by 16%). My hope is for all shareholders to remain, but if they prefer to be bought out, then this would enable that to happen at a nice premium.
Second, my intention is for all Tesla employees to remain shareholders of the company, just as is the case at SpaceX. If we were to go private, employees would still be able to periodically sell their shares and exercise their options. This would enable you to still share in the growing value of the company that you have all worked so hard to build over time.
Third, the intention is not to merge SpaceX and Tesla. They would continue to have separate ownership and governance structures. However, the structure envisioned for Tesla is similar in many ways to the SpaceX structure: external shareholders and employee shareholders have an opportunity to sell or buy approximately every six months.
Finally, this has nothing to do with accumulating control for myself. I own about 20% of the company now, and I don't envision that being substantially different after any deal is completed.
Basically, I'm trying to accomplish an outcome where Tesla can operate at its best, free from as much distraction and short-term thinking as possible, and where there is as little change for all of our investors, including all of our employees, as possible.
This proposal to go private would ultimately be finalized through a vote of our shareholders. If the process ends the way I expect it will, a private Tesla would ultimately be an enormous opportunity for all of us. Either way, the future is very bright and we'll keep fighting to achieve our mission.