CEO Elon Musk seems to have it all. The electric-car entrepreneur is the toast of Silicon Valley, Sacramento, and Tokyo after unveiling a plan to revive Toyota’s shuttered NUMMI plant last week. And deal-hungry Wall Street bankers are angling to take his company public. He’s even a Hollywood star, with a cameo in the hit Iron Man 2 movie, said to be based on his life story.
The one thing he doesn’t have, by his own admission, is money.
“About four months ago, I ran out of cash,” he wrote in a court filing dated Feb. 23, reviewed by VentureBeat. That’s a problem not just for him but for Tesla, where he is the lead investor and chief product architect, as well as CEO. Musk’s willingness to funnel his own cash into Tesla has for years sustained the faith of fellow investors and reassured would-be car buyers in 2008 when the company’s finances were in perilous shape.
According to the filing — part of his pending divorce case from sci-fi novelist Justine Musk — Elon Musk has been living off personal loans from friends since October 2009 and spending $200,000 a month while making far less. Musk confirmed this in an interview with VentureBeat.
Tesla, likewise, is dealing with its cash flow problems by borrowing money from a friendly source — the United States government, which has eagerly backed cleantech startups through a Department of Energy loan program. Tesla burned through $37 million in cash in the last three months of 2009, according to amended S-1 documents, filed with the Securities & Exchange Commission in preparation for its IPO. Tesla slowed this burn rate in the first quarter of 2010 to $8.4 million, but only by drawing down part of a $465 million loan from the DOE, while reporting a net loss of $29.5 million. Tesla’s sales were flat year-over-year in the first quarter, but declined precipitously in the U.S., according to a former Tesla executive.
Now, Toyota has agreed to buy $50 million in shares at the time of Tesla’s initial public offering — if it manages to go public before Dec. 31. But for now, the company doesn’t have access to that promised cash, and must pay $42 million to buy the NUMMI plant in Fremont, Calif., from a Toyota-General Motors joint venture.
Only one thing is certain: Tesla’s not getting more money from Musk.
Divorced from his fortune
Musk was Tesla’s first investor, and he kept the company afloat until recently through round after round of funding. After a Tesla employee leaked word in October 2008 to a reporter that the company was down to its last $9 million in cash, Musk promised to personally refund car buyers’ deposits if Tesla couldn’t deliver the vehicles — a promise he made in the pages of Car & Driver. At that time, those deposits — which Tesla calls “reservation payments” — were an important source of cash for the company.
And throughout Tesla’s history, Musk has used his entrepreneurial legend — Zip2, sold for $305 million to Compaq; PayPal, sold to eBay for $1.5 billion — to bolster his credibility as a technology executive. Musk’s personal take from Zip2 was a reported $22 million, much of which he invested in his next startup, PayPal, netting $160 million when eBay bought the online-payments startup. According to filings in his divorce trial, he had roughly $48 million in income from his investments between 2005 and 2008. But he sunk much of that money back into Tesla, as well as his other enterprises, the space-exploration concern SpaceX and solar panel finance startup SolarCity.
His finances were not always so strained. In other documents filed in the divorce case, Musk reportedly made $9,551,753 in 2008 and an average of $17.2 million a year from 2005 to 2008. As of Dec. 31, 2008, he also had extensive holdings in venture capital and private equity partnerships, ranging from Softbank Technology Ventures to Charles River Ventures to Clarium Capital. These partnerships, however, tend to be highly illiquid investments: It can take months to get out of them because you have to find a sophisticated buyer willing to bear the risks of a private sale.
As he ran low on cash, a contentious divorce — in which his ex-wife, Justine Musk, is seeking a sizable chunk of Musk’s holdings — caused him more financial problems. Justine Musk is asking a court to rip up a post-nuptial agreement she and Elon Musk signed in March 2000, which could in theory lead to much of his holdings being deemed community property. While there’s no telling how the case will turn out — it has already gone to appeal — more important is the protective order the court has slapped on Musk’s holdings in Tesla and his other illiquid assets. These include his stakes in private equity funds. He won’t be able to sell significant holdings without first getting permission from his ex-wife. And he has also been ordered by a court to continue paying her legal fees for the duration of the lengthy appeal process.
Refueling Tesla’s cash
Musk still owns roughly a third of Tesla — some 81 million shares out of approximately 250 million outstanding, according to the company’s filings. But keeping his ownership stake that high has come at a cost. In November 2007, in order to wield enough voting power to oust Tesla co-founder Martin Eberhard as CEO, he converted 8 million of his preferred shares into common shares. Two months later, Musk participated in a bridge loan to rebuff a separate effort by VantagePoint Venture Partners, a significant investor, to lead a deal that would have seriously diluted Musk’s control. VantagePoint partner Jim Marver left Tesla’s board as a result. From the perspective of Musk’s board allies, the move steadied the company at a time of significant employee turnover and potential loss of morale. (A VantagePoint spokesman declined to comment on Tesla board matters.)
The moves kept Musk in control of Tesla, but it also meant that his stake kept getting diluted in subsequent financing rounds. (Preferred shares often hold anti-dilution rights, but common shares typically do not.) And there were many subsequent rounds, including a highly dilutive convertible debt round in 2008. The first sign of trouble came last fall, when Musk, for the first time, did not participate in a financing round for Tesla.
The company has not disclosed Musk’s lack of financial liquidity or the potential implications of his divorce case in its filings — only that it is highly dependent on Musk’s services. Tesla has also begun reimbursing Musk for his private-jet flights, an expense he previously paid out of pocket. And while Tesla pays Musk only a minimal salary, its board awarded him 6.7 million stock options in December 2009 — the first time he has taken this kind of equity as compensation. It seems that Musk’s compensation from Tesla has increased since his personal finances became an issue.
A matter of disclosure
Should Tesla have mentioned all these facts in its S-1 filings? Eric Talley, a professor of law at Berkeley and co-director of the Berkeley centre for Law, Business, and the Economy, notes that Section 11 of the 1933 Securities Act requires that companies registering to go public not make materially misleading statements or omissions. But it’s far from clear what’s material in these cases, he said: “It’s not a black and white rule.”
A longtime observer of the company thinks the state of Musk’s finances is worth disclosing. “It’s up to the courts to decide, but this feels like material information,” said Dallas Kachan, managing partner of Kachan & Co., a cleantech research and analysis consultancy which follows Tesla.
The easiest way for Musk to get out of debt to his friends and settle accounts with his ex-wife would be for Tesla to go public and for Musk to unload much of his stake. After an IPO, his shares of Tesla would become a readily sold asset — except for the protective orders in his divorce case and a requirement of the DOE loan that Musk hold onto a certain percentage of his shareholdings until some time after units of Tesla’s forthcoming Model S start rolling off the NUMMI assembly line.
Asked to comment on whether Tesla’s disclosures so far have been adequate, John Heine, deputy director of the Security & Exchange Commission’s Office of Public Affairs, said his agency does not comment on companies with pending registrations to the press. Ricardo Reyes, a spokesman for Tesla Motors, has previously said the company had no plans to revise its filings with the SEC to reflect the possible impact of Musk’s divorce as a risk factor.
Should the company have said more? Perhaps, argues one observer.
“Transparency is thought to be a good thing for the operation of capital markets,” said Talley, the Berkeley law professor. “Bare compliance with SEC rules isn’t enough.”
Here are the documents detailing Musk’s finances:
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