Public investors poured funds into buying SpaceX shares upon its mid-June IPO, and they can be expected to continue to do so heavily over the coming months. Such investors should be wary of the company’s governance setup and the power it awards Elon Musk, write Lucian Bebchuk and Kobi Kastiel.
Public investors spent about $75 billion on SpaceX shares at its IPO on June 12. Although this is the largest amount raised in an IPO in financial history, public investors can be expected to spend additional hundreds of billions of dollars over the coming month as lock-up periods expire and many pre-IPO investors seek to cash out their shares and pocket large gains. Thus, public investors will keep assessing the price at which they would be willing to buy SpaceX shares. In doing so, they should, regardless of their view of Elon Misk’s unique leadership skills, attach substantial weight to the large governance risks that lie ahead.
Media reports suggest that for many investors who bought SpaceX shares at the IPO and since then, the decision was grounded in their highly favorable view of Musk’s talents and abilities. CNBC ran a program detailing how the existence of a large army of Musk fans and loyalists facilitated the IPO. The program quoted one retail investor stating that “[i]t’s hard to bet against Elon Musk in whatever he does.” A portfolio manager was quoted saying that “Elon gets this premium multiple because he has this vision of what’s going to happen in the future.”
Many Musk fans perceive him as uniquely capable of “growing the pie” (that is the total value that the company will generate). Such investors might well favor governance provisions that provide Musk with freedom to set the company’s business strategy with little outside interference. However, there are four major reasons why even the most fervent admirers of Musk should be troubled by the governance structure of SpaceX.
First, Musk might slice the pie in his favor.A belief that Musk knows best how to maximize the pie does not imply trusting how he will split that pie between public investors and himself. A major role of corporate governance rules and arrangements is to limit the extent to which public company insiders can split the pie in their favor. The design of SpaceX’s governance structure would give Musk expansive freedom not only to set the company’s strategy as he sees fit but also to allocate the pie as he wishes.
Among other things, an explicit provision of the SpaceX charters permits Musk to allocate any business opportunities presented to SpaceX to other business firms associated with him. Furthermore, Musk’s control would practically enable him to arrange related-party transactions that benefit him at the expense of public investors, sell a large fraction of SpaceX assets to entities owned by Musk at a favorable price, or secure giant pay awards. In these and other ways, Musk could obtain a substantially disproportionate slice of the pie, leaving public investors of SpaceX with considerably less than their pro rata share.
Second, quality of leadership changes over time. A strong belief that Musk is by far the best person to lead SpaceX today and in the coming years does not imply that he will remain so forever. The pages of business history are full of individuals who were at the very top of their game at one time but later on turned subpar or even value-destroying. Accordingly, even the most fervent fans of Musk should worry that Musk’s control is so deeply hard-wired into the SpaceX structure. Can they be certain that Musk, who is 54, will still be an adequate leader at 74 or 84? Furthermore, if Musk were to pass away, or to become incapacitated or incompetent, control would presumably pass to his heirs or those managing the trusts through which he holds his superior-voting shares. The prospectus does not disclose who these individuals are, making any assessment of this risk difficult.
In The Untenable Case for Perpetual Dual-Class Structure, we analyze the costs of an indefinite, perpetual dual-class structure. We explain that no matter how well a founder leads the company when it goes public, over time there is an increasing risk that the founder would cease to be the company’s most fitting leader. Indeed, subsequent empirical studies on the topic confirmed our economic prediction that the costs of indefinite dual-class structures rise, and their benefits decline, the longer such structures remain in place extend past the IPO.
It might be argued that, if a controller became no longer be a fitting leader for the company, the controller would have incentives to relinquish control and pass the helm to a fitting leader. However, Musk (or an heir of his) might fail to recognize and internalize the value of their passing the helm. Furthermore, because a majority of the costs of an ill-fitting leader would be borne by public investors, Musk (or an heir) might elect to stay at the helm and continue to enjoy the private benefits of control coming with it. (Recall that Sumner Redstone, who founded Viacom and led it to much success, continued to control it using dual-class structure even in his nineties when he reportedly could not speak or write clearly.)
Third, incentives matter, not just talent. Even if Musk were to remain the most fitting leader for decades, his performance would still much depend on his incentives. For any given leader, performance would likely be affected substantially by how closely his interests align with those of public investors. It is therefore important to recognize that the SpaceX structure would enable Musk to cash out a considerable fraction or even a large majority of his equity stake without weakening his grip on control.
Following the IPO, SpaceX shares likely represent a significant majority of Musk’s liquid wealth. Musk therefore could have substantial incentives to unload SpaceX shares and reduce his ownership stake. If Musk were to move to a “small-minority controller” structure, public investors could be significantly harmed: such structures could well produce costly distortions and inefficiencies with respect to a wide array of corporate decisions. (For a detailed analysis of the value-reducing costs associated with “small-minority controller” structures, where a controller has a minority or even a small minority equity stake, see our article The Perils of Small-Minority Controllers.)
Fourth, the investment of time and effort also matters. No matter how exceptional a corporate leader is, his performance will likely depend on the time and attention the leader devotes to the company. At Tesla, despite Musk’s massive pay package, he was not required to limit his outside activities or to commit any specific amount of time and attention to the company. Musk took considerable advantage of that freedom by spending substantial time away from Tesla during the months in which he first focused on the Twitter acquisition and then on leading the Department of Government Efficiency (DOGE). Importantly, although the design of SpaceX governance includes an ironclad commitment not to remove Musk from the CEO and chair positions, Musk would be entirely free to choose to spend most of his time and effort elsewhere.
To conclude, even for public investors who have an extremely favorable view of Musk’s current leadership talents, paying close attention to the governance structure of SpaceX would be warranted. Such an investor may pay little attention to the subject only if he also believes that:
(1) Musk will not elect to allocate the pie generated by his success in a way that would be highly favorable to himself;
(2) Musk will indefinitely remain the company’s most-fitting leader (and so will those to whom control of his high-voting shares would pass upon death, incapacitation, or incompetence);
(3) Musk will not cash out substantially and thereby move to a small-minority controller structure with its associated distortions and inefficiencies; and
(4) Musk will elect to devote much of his time and effort to SpaceX despite his freedom not to do so.
Of course, none of the risks discussed in this article is certain to materialize. But they are all serious risks. Therefore, even investors who believe that Musk walks on water should give these risks significant weight when assessing the value of SpaceX shares.
Authors’ Disclosures: Lucian Bebchuk served as an expert in the Delaware Tornetta litigation over Elon Musk’s compensation at Tesla. The authors report no conflicts of interest. You can read our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
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