You make a fair point as a generality. Yet this is the short term TSLA price movements thread. Much more specific context (TSLA).
TSLA options on Model 3 ramp are not a generality. Take this option at $180-200. Don't screw up your bit of the M3 ramp. You just won the difference between $180-$200 and $500-600 times leverage. If you are late with your windscreen wipers, poof, half of your huge bonus pay day disappears, maybe all of it, plus you will probably never work again because you screwed up payday across 300 supplier campuses.
This is not a generally applicable concept. It is absolutely applicable to TSLA options and the cheapest and most powerful thing Musk could apply a little bit of equity to.
Do you get it? If not I give up. Dear wall. My name is Julian. I have been telling these people about this company and where the shares are heading. Then the shares do exactly what I say they will, over and over and over and over again without fail - trade long throught this don't trade long through that buy here sell there until the only possible way to lose money on TSLA this year is to disagree with what I have said in the slightest! And yet some of them don't think I know what I am talking about, which despite logical argument for people to check for themselves and a 100% flawless track record is really quite strange, what do you think wall?........ Julian you are talking to a wall therefore you are an idiot QED. Ah.
Yes, I get it, but you have to accept that I very likely know a lot more about equity compensation than you do and things aren't as simple as you want them to be. I agree with your concept generally but it would be much better employed by the use of cash - give extra cash for meeting goals X, Y and Z. I will list out the problems with using options below. Feel free to continue to ignore if you wish.
1. The Plan likely does not allow for this to occur currently, unless the language is read in an extremely tortured manner.
2. The Plan cannot be amended before approximately May 2017, when shareholders vote at the 2017 Annual Meeting, short of calling a special shareholders meeting. This will never happen.
3. Shareholders must vote to approve the expansion of eligibility in the Plan. As I've noted, shareholders are generally against options and especially against using it outside the employee base (even options to directors are frowned upon). Might have an uphill battle there.
4. Options must be granted at or out of the money, otherwise Code Section 409A is violated. This is a constraint as it
guarantees that the grant does not have intrinsic value when it occurs.
5. Options without intrinsic value are not very attractive to employees of third party manufacturers. They do not have the ability to drive the stock price in any meaningful way, so they feel like a possibility of being in the money is luck. This is why options are reserved for top management, if it all.
6. If the price sinks after grant, they no longer provide a meaningful incentive at all. Repriced options are out of the question as just about every plan forbids this short of getting shareholder approval. I can't tell you how many companies arrive at this predicament then switch to big RSU retention grants to keep execs from leaving bc everything is underwater. This would be quite magnified for a supplier. They have no loyalty or ties to Tesla to keep them producing - only the prospect of making a buck. Also, all of these grants are very expensive to the company.
7. Accounting issues, as I've noted.
8. Extreme administrative complexity. It's bad enough administering equity plans for actual employees, departed employees and directors (ask me how I know) - I can't even imagine adding in multiple employees from 100+ third-party suppliers or whatever. They don't know proper company procedures, interactions with brokers and the transfer agent would be a mess, etc. Options generally have a term of 10 years. Can you imagine following all these non-connected individuals around for 10 years tracking their options?
9. This would be very unusual and would receive a spotlight from numerous angles. Shareholder advisory groups (e.g., ISS and Glass-Lewis) would be very angry and probably recommend shareholders vote down the pay packages for execs and recommend against the plan amendment, etc. Ultimately maybe not a huge impact but definitely negative publicity.
10. You may disagree, but options are often reserved for companies in financial distress - particularly when extended to suppliers. This would not be well-received in the market in my opinion.
11. Maybe most importantly, there's no good way to claw these back. You could try and draft it to only have them vest upon certain milestones, but what if they fail their duties after vesting in some options? How do you get them back? You emphatically cannot just take them back - any adverse change in the award agreement language with respect to vested options cannot be effectuated without written agreement between the recipient and Tesla. Employee options often expire some short period after termination to avoid them holding on to them for 10 years. Can't do that with these options. Once they vest, that's it - unless you could get them to agree to some weird language about forfeiture if the supplier relationship ends or something. Anyone with a brain wouldn't sign something like that.
I could think of more problems but getting tired of typing. Back to regularly scheduled short term thread.
