Posted on 06/09/2010 10:35:26 PM PDT by anymouse
Tesla Motors 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 Center 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:
“Ahhh... now we see the cost of peace for the Obama Admin to get off Toyota’s back.”
brilliant observation. Any doubt will be removed when they are forced to rehire UAW workers laid off by the NUMMI venture.
SpaceX is a good company producing results and products. Tesla appears to be a huge scam. The electric car is barely more realistic now than it was in the 80’s, especially high end ones for millionaires. Now that the economy’s finished for awhile, they should shut down Tesla, sell anything they can from it, and put everything into SpaceX.
Yep and Tesla understood how and why his various devices worked. Tesla was way, way ahead of his time and rarely ever gets the credit he deserves. I watched Empire of the Air a few nights ago, the Ken Burns movie about radio pioneers. I was stunned to see them give Lee De Forest ANY credit for inventing radio. Tesla won a patent dispute in the 1940's showing clearly it was him, not De Forest, who had discovered electromagnetic wave propagation, but Tesla's name was never mentioned once in Burns' film. De Forest was a con man, not an engineer. Lee De Forest, in one of his many patent suits, was put on the witness stand to testify about his supposed invention of the vacuum tube. In three and one half hours he could not explain how it worked. I can explain how a vacuum tube works to a five year old in less than one minute......
He-He! Old Willie is getting quite a reputation around here, isn't he?
Just to help this guy out, I forwarded him some emails I got from Nigeria.
Musk should divorce his wife, sell his stock in Tesla, and then focus solely on SpaceX.
That's an unfair statement. I know a few good jokes.
“I would not go so far as to say there will never be viable electrics”
There are....in their niche. I’m not trying to be cute, but a golf cart is an example. Never very far from a charging station, a defined, understood transport requirement that doesn’t vary much, and never so far away that you can’t walk back to where you started.
Mass market electric cars will fail because they do not meet the “golf cart” test - so there will be a risk of exceeding the operational capabilities at all times.
He-He! Old Willie is getting quite a reputation around here, isn't he?Back stabbing cowards alert.
Life is short and cheap on the Internet range. Few survive.
Back stabbing cowards alert.
Thank-you for the heads-up, lewis.
Excuse me, but where is the "backstabbing", cowboy?
I've confronted Willie on numerous occasions over his ridiculous mass transit schemes he posts here with cold hard FACTS to which he can only reply with his own even more ridiculous opinions. If there's a coward here, partner, it's you!
Creep.
Excuse me, but where is the "backstabbing", cowboy?
"backstabbing" may not be the correct terminology,
but talking about me on a thread on which I am not a participant is a breach of forum etiquette.
“I’m thinking many of the densely populated Asian cities would work for the electrics. “
And in fact in China they use electric powered bicycles quite a bit. It passes the “golfcart” criteria....you can pedal home if you need to.
As far as talking about you, that's a bit of a stretch, don't you think? I commented on another persons comment about you. Remember that "reputation" I said you were developing? I was not the originator and my comments were not derogatory in any way. I merely said you were developing quite a reputation here. I've had far worse comments with totally false accusations made about me on threads where I was not a participant and I could not care less because I know exactly who and what I am. Perhaps the reason you are so sensitive to it is insecurity on your part? If you're trolling for an apology, forget it. You ain't gonna get one.....
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