If Elon Musk managed to nab a $550 million valuation for his capital-intensive, chronically plagued car company from Daimler, it’s a truly impressive feat.
Equally impressive, if the widely reported figure of $50 million invested is correct, he managed to get a fresh slug of equity in Tesla for himself, and other earlier investors, at a discount.
The last two times Tesla raised money for itself was through convertible debt financing. Musk led each of those $40 million raises.
Someone familiar with the terms of the convertible debt tells us there was a trigger in place that stipulated the debt converts to equity if Tesla raised an additional round at $50 million or above.
The conversion preference is 60%. So Musk and his investors including VantagePoint and Draper Fisher Jurvetson, get to convert their $80 million in debt to equity at a 40% discount of the price that Diamler paid. If the rumoured $550 million is correct, then the valuation at which the debt is converted is $330 million (60% X $550 million). Meaning Musk and company get the debt converted to equity at a valuation that’s below what Daimler just bought in for. Or in lay terms: cheaper.
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This is a brilliant bit of financing. At the time Tesla raised the convertible debt, it was on death’s door. It had just $9 million. Musk tried and failed to raise $100 million and it was unclear the company would survive. By raising debt, Musk and his investors took a chance, but a calculated one. It looks like it paid off.
If the company failed, their money wasn’t completely sunk because debt holders get reimbursed before shareholders. The downside is that if Tesla’s fortunes improved, they simply get repaid. They don’t get the juicy upside of a growing company. By inserting the trigger, suddenly Musk and Co. get equity at an attractive rate and are positioned to partake in Tesla’s upside.
The good news for the earlier shareholders is that they don’t probably don’t get diluted. The last time Tesla raised a round we’re told the valuation was around $250 million.
Why would Daimler let this happen? It’s not necessarily in its best interest but it’s not a dealbreaker, either. They have “future options” in the contract, so that could mean any number of things, including options to pick up more equity down the road at favourable terms.
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