SpaceX’s IPO filing reveals favorable terms for Elon Musk

In January, SpaceX gave Elon Musk, its founder and CEO, a pay package that ended up totaling 1.3 billion restricted shares. The prize was conditional on the rocket company establishing a colony on Mars with a million inhabitants and launching powerful data centers into space.

Mr Musk has not achieved these goals. Even so, those 1.3 billion shares can vote according to shareholder decisions SpaceX Offering Prospectuswhich was published on Wednesday. In other words, the company is allowing Mr. Musk to vote with shares he has not yet earned.

“I’ve never heard of it,” said Ann Lipton, a law professor at the University of Colorado, Boulder. “Basically, he found a way to penetrate the normal rules of corporate organization.

Restricted stock wasn’t the only unusual corporate governance arrangement SpaceX unveiled as it prepares what could be the largest initial public offering ever. The company that builds the rockets and operates the Starlink satellite Internet service has valued itself at more than $1.25 trillion, and its IPO — due as early as next month — is likely to create a bonanza for Wall Street, Silicon Valley and, of course, Mr. Musk.

Among the atypical arrangements, SpaceX does not plan to have a majority of its board made up of independent directors. It added that it will not use a committee of independent board members to determine executive compensation, as most companies do. And its governing documents say that any shareholder claims under federal securities law must be resolved by arbitration.

All of these moves seem to benefit one person: Mr. Musk.

The measures give him greater control over the company, where he controls 85 percent of shareholder votes, corporate governance experts said. They allow Mr. Musk to put more insiders on SpaceX’s board, choose the people who determine his pay and largely insulate himself from shareholder lawsuits, they said.

The measures are a “moat” that will “permanently cement” him as CEO, said Brian Quinn, a law professor at Boston College who studies corporate governance. He called the January compensation package “insane.”

What SpaceX is doing goes beyond corporate governance structures at Tesla, Mr. Musk’s electric car maker. In September, Tesla awarded him a stock compensation package related to the company’s valuation increase and operational milestones, such as the commercial deployment of one million autonomous taxis. But Mr. Musk cannot vote those shares until he reaches operating goals, according to Tesla’s filing.

SpaceX’s regulatory action serves as a warning to those looking to buy its IPO, Mr. Quinn said. “It’s terrible for shareholders,” he said.

Mr Musk, SpaceX and Tesla did not respond to requests for comment.

At Tesla, where Mr. Musk owns less than 30 percent, he has worried about a lack of control and the possibility of being challenged by other shareholders. But SpaceX has different classes of shares, and its power there stems from shares known as “super voting” shares.

Outside investors in SpaceX can buy Class A shares, which carry one vote each. According to the company’s prospectus, Mr. Musk owns more than 5.5 billion Class B shares — “super voting” because they carry 10 votes per share. Overall, he holds about 94 percent of SpaceX’s Class B shares and 85 percent of all votes.

Mr. Musk’s super voting stock stands out. Meta and Google also have super voting shares for their executives. Even so, Mark Zuckerberg, CEO of Meta, controls 61 percent of the votes in his company.

The shares give Mr. Musk the power to make decisions on many company matters himself. “Mr. Musk will have the power to control the outcome of matters requiring stockholder approval, including the election of all of our directors, and to control our business and affairs,” SpaceX’s prospectus said.

SpaceX’s eight board members include Mr. Musk’s friends Luke Nosek, a venture capitalist, and Antonio Gracias, a private equity investor who was previously on Tesla’s board. They did not respond to requests for comment.

A significant portion of Mr. Musk’s voting stock was awarded in his January compensation package. He can take out loans on those shares with the approval of the board he controls, said Mr. Quinn of Boston College, adding that because the billionaire technically didn’t make a profit on the shares, he doesn’t have to pay taxes on the grant.

Some of SpaceX’s management measures have already been reviewed. This month, executives overseeing state and municipal pension funds in New York and California criticized the company’s requirement that shareholder challenges be resolved through mandatory arbitration.

“Mandatory arbitration removes the class-action structure necessary to remedy large-scale damages,” officials overseeing pension funds he wrote in a letter to SpaceX. They added that no major US issuer had ever had such a provision for its IPO

SpaceX’s management structure “frightens me,” said Ms. Lipton of the University of Colorado.