Upon losing his $55B+ Tesla compensation package, CEO Elon Musk warned X users against incorporating their companies in Delaware, instead recommending Nevada or Texas “if you prefer shareholders to decide matters.”
Tesla is based in Austin, Texas — so why is it, alongside so many companies, incorporated in Delaware?
The backstory
In 2018, an already-wealthy Musk agreed to work 10 years without pay, in exchange for stock options worth $55.8B if Tesla achieved a $650B valuation. The pay was meted out along 12 milestones, which Musk satisfied in 2023.
While Tesla argued that the payout was needed to ensure Musk’s ultimately beneficial focus remained on the company, shareholders sued over the plan, alleging:
- It was too big.
- Musk was too cozy with the board members who agreed to the plan, his brother among them.
- They didn’t receive enough info before approving it.
A Delaware judge agreed and recalled Musk’s compensation package. Now, Tesla must devise a new pay structure or appeal.
Why Delaware?
Over 1.8m businesses — and ~66% of Fortune 500 companies — are incorporated in the state, including Amazon and Alphabet.
Delaware’s Court of Chancery is the oldest business court in the US. It uses judges over juries for speedier trials, and it’s clear and current on corporate laws.
It’s convenient, respected, and has experience ruling in business-related cases. It’s usually pretty predictable, which is appealing to investors and the startups that want their money.
So why is Musk mad at Delaware?
He didn’t get his way.
The Musk decision wasn’t necessarily expected — analyst Dan Ives said he was shocked that Tesla lost in Delaware, calling it a “huge legal decision,” per NPR — but neither was Musk’s compensation, which would have been, by far, the biggest ever paid to an executive.
We’ll see how this shakes out in a likely appeal. In the interim, even without Tesla, Delaware probably won’t be hurting for new businesses.
