by Ashlee Vance
APPENDIX 3
From: Elon Musk
Date: June 7, 2013, 12:43:06 AM PDT
To: All
Subject: Going Public
Per my recent comments, I am increasingly concerned about SpaceX going public before the Mars transport system is in place. Creating the technology needed to establish life on Mars is and always has been the fundamental goal of SpaceX. If being a public company diminishes that likelihood, then we should not do so until Mars is secure. This is something that I am open to reconsidering, but, given my experiences with Tesla and SolarCity, I am hesitant to foist being public on SpaceX, especially given the long term nature of our mission.
Some at SpaceX who have not been through a public company experience may think that being public is desirable. This is not so. Public company stocks, particularly if big step changes in technology are involved, go through extreme volatility, both for reasons of internal execution and for reasons that have nothing to do with anything except the economy. This causes people to be distracted by the manic-depressive nature of the stock instead of creating great products.
It is important to emphasize that Tesla and SolarCity are public because they didn’t have any choice. Their private capital structure was becoming unwieldy and they needed to raise a lot of equity capital. SolarCity also needed to raise a huge amount of debt at the lowest possible interest rate to fund solar leases. The banks who provide that debt wanted SolarCity to have the additional and painful scrutiny that comes with being public. Those rules, referred to as Sarbanes-Oxley, essentially result in a tax being levied on company execution by requiring detailed reporting right down to how your meal is expensed during travel and you can be penalized even for minor mistakes.
YES, BUT I COULD MAKE MORE MONEY IF WE WERE PUBLIC
For those who are under the impression that they are so clever that they can outsmart public market investors and would sell SpaceX stock at the “right time,” let me relieve you of any such notion. If you really are better than most hedge fund managers, then there is no need to worry about the value of your SpaceX stock, as you can just invest in other public company stocks and make billions of dollars in the market.
If you think: “Ah, but I know what’s really going on at SpaceX and that will give me an edge,” you are also wrong. Selling public company stock with insider knowledge is illegal. As a result, selling public stock is restricted to narrow time windows a few times per year. Even then, you can be prosecuted for insider trading. At Tesla, we had both an employee and an investor go through a grand jury investigation for selling stock over a year ago, despite them doing everything right in both the letter and spirit of the law. Not fun.
Another thing that happens to public companies is that you become a target of the trial lawyers who create a class action lawsuit by getting someone to buy a few hundred shares and then pretending to sue the company on behalf of all investors for any drop in the stock price. Tesla is going through that right now even though the stock price is relatively high, because the drop in question occurred last year.
It is also not correct to think that because Tesla and SolarCity share prices are on the lofty side right now, that SpaceX would be too. Public companies are judged on quarterly performance. Just because some companies are doing well, doesn’t mean that all would. Both of those companies (Tesla in particular) had great first quarter results. SpaceX did not. In fact, financially speaking, we had an awful first quarter. If we were public, the short sellers would be hitting us over the head with a large stick.
We would also get beaten up every time there was an anomaly on the rocket or spacecraft, as occurred on flight 4 with the engine failure and flight 5 with the Dragon prevalves. Delaying launch of V1.1, which is now over a year behind schedule, would result in particularly severe punishment, as that is our primary revenue driver. Even something as minor as pushing a launch back a few weeks from one quarter to the next gets you a spanking. Tesla vehicle production in Q4 last year was literally only three weeks behind and yet the market response was brutal.
BEST OF BOTH WORLDS
My goal at SpaceX is to give you the best aspects of a public and private company. When we do a financing round, the stock price is keyed off of approximately what we would be worth if publicly traded, excluding irrational exuberance or depression, but without the pressure and distraction of being under a hot public spotlight. Rather than have the stock be up during one liquidity window and down during another, the goal is a steady upward trend and never to let the share price go below the last round. The end result for you (or an investor in SpaceX) financially will be the same as if we were public and you sold a steady amount of stock every year.
In case you are wondering about a specific number, I can say that I’m confident that our long term stock price will be over $100 if we execute well on Falcon 9 and Dragon. For this to be the case, we must have a steady and rapid cadence of launch that is far better than what we have achieved in the past. We have more work ahead of us than you probably realize. Let me give you a sense of where things stand financially: SpaceX expenses this year will be roug[h]ly $800 to $900 million (which blows my mind btw). Since we get revenue of $60M for every F9 flight or double that for a FH or F9-Dragon flight, we must have about twelve flights per year where four of those flights are either Dragon or Heavy merely in order to achieve 10% profitability!
For the next few years, we have NASA commercial crew funding that helps supplement those numbers, but, after that, we are on our own. That is not much time to finish F9, FH, Dragon V2 and achieve an average launch rate of at least one per month. And bear in mind that is an average, so if we take an extra three weeks to launch a rocket for any reason (could even be due to the satellite), we have only one week to do the follow-on flight.
MY RECOMMENDATION
Below is my advice about regarding selling SpaceX stock or options. No complicated analysis is required, as the rules of thumb are pretty simple.
If you believe that SpaceX will execute better than the average public company, then our stock price will continue to appreciate at a rate greater than that of the stock market, which would be the next highest return place to invest money over the long term. Therefore, you should sell only the amount that you need to improve your standard of living in the short to medium term. I do actually recommend selling some amount of stock, even if you are certain it will appreciate, as life is short and a bit more cash can increase fun and reduce stress at home (so long as you don’t ratchet up your ongoing personal expenditures proportionately).
To maximize your post tax return, you are probably best off exercising your options to convert them to stock (if you can afford to do this) and then holding the stock for a year before selling it at our roughly biannual liquidity events. This allows you to pay the capital gains tax rate, instead of the income tax rate.
On a final note, we are planning to do a liquidity event as soon as Falcon 9 qualification is complete in one to two months. I don’t know exactly what the share price will be yet, but, based on initial conversations with investors, I would estimate probably between $30 and $35. This places the value of SpaceX at $4 to $5 billion, which is about what it would be if we were public right now and, frankly, an excellent number considering that the new F9, FH and Dragon V2 have yet to launch.
Elon
ACKNOWLEDGMENTS
FROM A PROCESS PERSPECTIVE, this will always be two books instead of one in my mind. There’s the time Before Elon, and the time After Elon.
The first eighteen months or so of reporting were filled with tension, sorrow, and joy. As mentioned in the main text, Musk initially opted against helping me with the project. This left me going from interview subject to interview subject, giving a huge windup each time to try to talk an ex-Tesla employee or an old schoolmate into an interview. The highs came when people agreed to talk. The lows came when key people said no and to not bother them again. String four or five of those no’s together in a row, an
d it felt at times like writing a proper book about Musk was impossible.
The thing that keeps you going is that a few people do say yes and then a few more, and—interview by interview—you start to figure out how the past fits together. I’ll be forever grateful to the hundreds of people who were willing to give freely of their time and especially to those who let me come back again and again with questions. There are too many of these people to list, but gracious souls—like Jeremy Hollman, Kevin Brogan, Dave Lyons, Ali Javidan, Michael Colonno, and Dolly Singh—each provided invaluable insights and abundant technical help. Heartfelt thanks go as well to Martin Eberhard and Marc Tarpenning, both of whom added crucial, rich parts to the Tesla story.
Even in this Before Elon period, Musk did permit some of his closer friends to speak with me, and they were generous with their time and intellect. That’s a special thanks then to George Zachary and Shervin Pishevar, and especially to Bill Lee, Antonio Gracias, and Steve Jurvetson, who really went out of their way for Musk and for me. And I obviously owe a tremendous debt of gratitude to Justine Musk, Maye Musk, Kimbal Musk, Peter Rive, Lyndon Rive, Russ Rive, and Scott Haldeman for their time and for letting me hear some of the family stories. Talulah Riley was kind enough to let me interview her and keep prying into her husband’s life. She really brought out some aspects of Musk’s personality that I had not encountered elsewhere, and she helped build a much deeper understanding of him. This meant a lot to me, and, I think, it will to the readers as well.
Once Musk agreed to work with me, much of the tension that accompanied the reporting went away and was replaced by excitement. I got access to people like JB Straubel, Franz von Holzhausen, Diarmuid O’Connell, Tom Mueller, and Gwynne Shotwell, who are all among the most intelligent and compelling figures I’ve run into during years of reporting. I’m forever grateful for their patience explaining bits of company history and technological basics to me and for their candor. Thanks as well to Emily Shanklin, Hannah Post, Alexis Georgeson, Liz Jarvis-Shean, and John Taylor, for dealing with my constant requests and pestering, and for setting up so many interviews at Musk’s companies. Mary Beth Brown, Christina Ra, and Shanna Hendriks were no longer part of Musk Land near the end of my reporting but were all amazing in helping me learn about Musk, Tesla, and SpaceX.
My biggest debt of gratitude, of course, goes to Musk. When we first started doing the interviews, I would spend the hours leading up to our chats full of nerves. I never knew how long Musk would keep participating in the project. He might have given me one interview or ten. There was real pressure to get my most crucial questions answered up front and to be to the point in my initial interviewing. As Musk stuck around, though, the conversations went longer, were more fluid, and became more enlightening. They were the things I most looked forward to every month. Whether Musk will change the course of human history in a massive way remains to be seen, but it was certainly a thrilling privilege to get to pick the brain of someone who is reaching so high. While reticent at first, once Musk committed to the project, he committed fully, and I’m thankful and honored that things turned out that way.
On a professional front, I’d like to thank my editors and coworkers over the years—China Martens, James Niccolai, John Lettice, Vindu Goel, and Suzanne Spector—each of whom taught me different lessons about the craft of writing. Special thanks go to Andrew Orlowski, Tim O’Brien, Damon Darlin, Jim Aley, and Drew Cullen, who have had the most impact on how I think about writing and reporting and are among the best mentors anyone could hope for. I must also offer up infinite thanks to Brad Wieners and Josh Tyrangiel, my bosses at Bloomberg Businessweek, for giving me the freedom to pursue this project. I doubt there are two people doing more to support quality journalism.
A special brand of thanks goes to Brad Stone, my colleague at the New York Times and then at Businessweek. Brad helped me shape the idea for this book, coaxed me through dark times, and was an unrivaled sounding board. I feel bad for pestering Brad so incessantly with my questions and doubts. Brad is a model colleague, always there to help anyone with advice or to step up and take on work. He’s an amazing writer and an incredible friend.
Thanks as well to Keith Lee and Sheila Abichandani Sandfort. They are two of the brightest, kindest, most genuine people I know, and their feedback on the early text was invaluable.
My agent David Patterson and editor Hilary Redmon were instrumental in helping pull this project off. David always seemed to say the right thing at low moments to pick up my spirits. Frankly, I doubt the book would have happened without the encouragement and momentum he provided during the initial part of the project. Once things got going, Hilary talked me through the trickiest moments and elevated the book to an unexpected place. She tolerated my hissy fits and made dramatic improvements to the writing. It’s wonderful to finish something like this and come out the other side with a pair of such good friends. Thanks so much to you both.
Last, I have to thank my family. This book turned into a living, breathing creature that made life difficult on my family for more than two years. I didn’t get to see my young boys as much as I would have liked during this time, but when I did they were there with energizing smiles and hugs. I’m thankful that they both seem to have picked up an interest in rockets and cars as a result of this project. As for my wife, Melinda, well, she was a saint. From a practical perspective, this book could not have happened without her support. Melinda was my best reader and ultimate confidante. She was that best friend who knew when to try to energize me and when to let things go. Even though this book disrupted our lives for a long while, it brought us closer together in the end. I’m blessed to have such a partner, and I will forever remember what Melinda did for our family.
NOTES
1.Journal of the Canadian Chiropractic Association, 1995.
2.http://queensu.ca/news/alumnireview/rocket-man.
3.http://www.marieclaire.com/sex-love/relationship-issues/millionaire-starter-wife.
4.The investor Bill Lee, one of Musk’s close friends, originated this phrase.
5.http://archive.wired.com/science/space/magazine/15-06/ff_ space_musk?currentPage=all.
6.http://news.cnet.com/Electric-sports-car-packs-a-punch%2C-but-will-it-sell/2100-11389_3-6096377.xhtml.
7.http://www.nytimes.com/2006/07/19/business/19electric.xhtml.
8.A southern gentleman, Currie could never get used to Musk’s swearing—“he curses like a sailor and does it in mixed company”—or the way he would churn through prized talent. “He’d search through the woods, turn over every rock and dig through brambles to find the one person with the specific expertise and skill he wanted,” Currie said. “Then, that guy would be gone three months to a year later if he didn’t agree with Elon.” Currie, though, remembers Musk as inspirational. Even as Tesla’s funds dwindled, Musk urged the employees to do their jobs well and vowed to give them what they needed to be successful. Currie, like many people, also found Musk’s work ethic astonishing. “I would be in Europe or China and send him an email at two thirty in the morning his time,” Currie said. “Five minutes later, I’d get an answer back. It’s just unbelievable to have support on that level.”
9.http://www.mercurynews.com/greenenergy/ci_7641424.
10.http://www.telegraph.co.uk/culture/3666994/One-more-giant-leap.xhtml.
11.http://www.sia.org/wp-content/uploads/2013/06/2013_SSIR_ Final.pdf.
12.Another moment like this occurred in late 2010 during a launch attempt in Florida. One of the SpaceX technicians had left a hatch open overnight at the launchpad, which allowed rain to flood a lower-level computing room. The water caused major issues with SpaceX’s computing equipment, and another technician had to fly out from California right away with Musk’s American Express card in hand to fix the emergency in the days leading up to the launch.
The SpaceX engineers bought new computing gear right away and set it up in the room. They needed to run the equipment through standard tests to make sure it could maintain a
certain voltage level. It was late at night on a Sunday, and they couldn’t get access on short notice to a device that could simulate the high electrical load. One of the engineers improvised by going to a hardware store where he bought twenty-five headlamps for golf carts. The SpaceX crew strung them all together back at the launchpad and hung them from a wall. They then put on their sunglasses and lit everything up, knowing that if a power supply for the computing equipment could survive this test, it would be okay for the flight. The process was repeated for numerous power supplies, and the team worked from 9 P.M. that night until 7 A.M. and finished in time to keep the launch on track.
13.http://www.space.com/15874-private-dragon-capsule-space-station-arrival.xhtml.
14.At the conclusion of the debate, Musk and I exchanged a couple of emails. He wrote, “Oil and gas is firmly in the Romney camp and they are feeding his campaign these talking points. Until recently, they didn’t care about Tesla, as they thought we would fail.
“Ironically, it is because they are starting to think Tesla might not fail that they are attacking us. The reason is that society has to function, so the less there seems to be a viable alternative to burning hydrocarbons, the less pressure there is to curb carbon emissions. If an electric car succeeds, it spoils that argument.
“Overall though, I think it is great that he mentioned us :) ‘Romney Tesla’ is one of the top Google searches!”