Delaware, Elon Musk, and Compensation

Delaware, Elon Musk, and Compensation


Delaware's Court of Chancery recently ordered that Elon Musk’s $55.8 billion compensation package from Tesla be undone. On the surface, the decision can be confusing since Elon Musk has contributed so much to Tesla. Can a court even get involved with compensation?

Since there's a lot of interest in this ruling, we thought it'd be helpful to provide startup founders with a summary of the legal reasoning behind the outcome. So we read through the entire 200-page opinion to make the outline below for you. Enjoy!

What was the logic of the opinion?


  • A Tesla stockholder sued Elon Musk and Tesla, saying that the Tesla board breached its fiduciary duties by awarding Musk an unusually large compensation package.
  • By default, Delaware courts don’t question business decisions like compensation.
  • An exception is when there is a conflict of interest (i.e. a risk of self-dealing).
    • This can happen when a company sets compensation for someone who controls the company, since they might try to give themselves more compensation at the expense of other stockholders.
    • The court found Elon Musk to have control of the company with respect to his compensation because the majority of the compensation committee were Musk's friends or beholden to him in some way.

"Entire Fairness" Standard

  • If there is a conflict of interest, Delaware courts use a standard known as "entire fairness" instead of the "business judgment rule".
    • The "entire fairness" standard is well-established case law.
    • The standard has two aspects: "fair price" and "fair dealing" (whether a "fair process" was followed in making the decision).
  • If the decision was approved by fully-informed, disinterested stockholders, the plaintiff has the burden of proof to show that the "entire fairness" standard was not met.
    • The plaintiff in this case was the stockholder suing Elon Musk.
    • To fully inform the stockholders, the company needs to tell the stockholders if any of the decision-makers had a conflict of interest.
    • The company also needs to tell the stockholders important details about the process it followed in making the decision.
  • Tesla got consent from disinterested stockholders, but the court found it wasn't fully informed.
    • Tesla didn't tell stockholders about conflicts of interest with the compensation committee. Instead, Tesla told stockholders that the compensation committee was fully independent.
    • Tesla also didn't disclose that the compensation committee had not actually tried to negotiate the compensation or do any customary benchmarking.
  • As a result, the burden of proof was on Elon Musk's lawyers to prove the "entire fairness" standard had been met.

Failure to Prove "Entire Fairness"

  • The court found that Elon Musk's lawyers proved neither "fair dealing" nor "fair price", the two aspects of the "entire fairness" standard.
  • The court found "fair dealing" hadn't been proved in part because there was no real negotiation of the compensation package. The compensation committee members testified that they were just cooperating with Musk.
  • Musk's lawyers tried to prove "fair price" seven different ways but didn't persuade the court with any of them.
    1. The compensation package Tesla gave to Elon Musk was worth the increased alignment and commitment Tesla got from him.
      • The court wasn't persuaded that what Tesla gave was necessary to get Musk's alignment and commitment.
        • Musk's large ownership stake in Tesla already aligns him with Tesla.
        • Other founders like Zuckerberg, Bezos, Gates, etc. with large ownership stakes in their companies didn't need additional compensation to remain aligned and committed to their companies.
        • Musk testified he would have stayed with Tesla even without the compensation package.
        • There was evidence at trial that the size of the compensation package was based on goals Musk had that weren't related to Tesla.
    2. It was a precarious time for Tesla, and Musk required "dopamine hits" to be incentivized to stay at the helm.
      • The court was not convinced by this because the compensation package terms didn't require Musk to spend any particular amount of time or energy working on Tesla, weakening the argument that the board was worried about incentivizing Musk to focus on Tesla.
    3. The structure of the compensation package contained provisions and stockholder protections that resulted in only upside for stockholders.
      • The court agreed that the compensation package's structure had some value as far as protecting stockholders, but this wasn't enough to prove fair price.
    4. The milestones Musk had to accomplish were "audacious" and "extraordinarily ambitious".
      • The court wasn't convinced by this argument because, at the time of the grant, three of the milestones were projected to be achieved anyways, and others were estimated at the time to have a 70% chance of being achieved.
    5. The compensation was similar to what a CEO would get when hired for a VC or PE-backed company.
      • The court didn't find this persuasive because Tesla wasn't a VC or PE-backed company, and Musk already owned a large percentage of the company.
    6. The package was approved by a majority disinterested stockholder vote.
      • As the court determined earlier, the stockholders weren't fully informed. As a result, the stockholder consent couldn’t be used as evidence of "fair price".
    7. Because Tesla thrived as a result of the compensation package, the price was fair in hindsight.
      • The court couldn't find proof that the compensation package was solely or directly responsible for Musk's efforts, so did not find this argument to prove a fair price.


  • Because the court found that Elon Musk's lawyers didn't prove either "fair dealing" or "fair price", the two aspects of the "entire fairness" standard, it ruled in favor of the plaintiff.
  • The plaintiff had asked for rescission of the grant, which was supported by case law as a valid remedy. Elon Musk's lawyers hadn't proposed any viable alternative, so the court ordered full recission of the grant.

Hopefully this gives you a clear understanding of how the case was decided! We've done our best to distill the opinion down to the essence of its logic. If you want to get into the details, you can read the full opinion on the Delaware Court of Chancery's website.

What are startup attorneys saying?

In case it's helpful, we've put together a list of commentary on this case by well-regarded startup attorneys and law firms:

Subject to any changes that might happen if the case is appealed, the key takeaways from these attorneys and law firms are:

  • Make sure that stockholders are given relevant information when having them approve decisions involving conflicts of interest.
  • Compensation committees should ideally be comprised of directors that don't have a conflict of interest.
  • If compensation for a controlling stockholder is unusually large, it should ideally be negotiated, benchmarked, and in service of company objectives.

None of this is new to competent corporate attorneys, but this case provides a high-profile reminder of how Delaware corporate law works.

These takeaways are more likely to be relevant for large companies like Tesla, because most early-stage startup founders aren't giving themselves above-market compensation. In addition, litigation about compensation is very uncommon with early-stage startups, unless there's a scheme to defraud investors or co-founders. This is in part because litigation can easily kill an early-stage startup, which would be counterproductive for stockholders.

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