In mid-2025, Tesla granted CEO Elon Musk a staggering 96 million shares tied to an effective exercise price of $23.34/share, the same as his voided 2018 award. At Tesla's trading price of around $300/share, the total equity value could exceed $27 billion. But beneath the headline lies a vastly sophisticated design:
Let's unpack how this hybrid works, what it means for Musk and Tesla tax-wise, and what lessons founders and executives can take home.
ISOs must have an exercise price at or above FMV on the grant date (IRC §422(b)(4)). With Tesla stock presently valued at around $300, a $23.34 price is far too low to qualify. For a deeper primer on instruments, see our page on understanding ISOs, NSOs, and RSUs.
While NSOs allow any strike price, a strike below FMV on grant generally triggers IRS Section 409A implications, treating them as deferred compensation—leading to immediate tax, a 20% penalty, and interest.
This award has several unique features:
This design lets Tesla avoid 409A penalties by treating it as an RSU with meaningful vesting and risk of forfeiture, and gives Musk option-like economics without the disallowed discount.
By classifying it as a restricted stock award, not an option with a discounted strike, Tesla avoids constructing deferred comp that violates 409A even though the "purchase price" is well under the current FMV. We outline the guardrails in our RSU Tax Strategy Guide.
The 5-year hold aligns Musk’s interests with long-term shareholders, but the sale exception offers needed liquidity for taxes.
Because Musk must buy at vesting, the structure mitigates immediate dilution. Plus, if the Delaware courts reinstate the 2018 award, this interim grant may be forfeited or offset, avoiding "double-dipping."
Given Musk's residency in Texas (0% state income tax), here's the breakdown:
| Tax Component | Rate (%) | Estimated Amount |
|---|---|---|
| Federal income tax (top bracket) | 37% | ~$9.83 billion |
| Medicare tax (1.45%) | 1.45% | ~$385 million |
| Additional Medicare surtax | 0.9% | ~$239 million |
| Total federal tax | ~39.35% | ~$10.45 billion |
| State income tax (TX) | 0% | $0 |
| Total estimated tax liability | — | ~$10.45 billion |
Had Musk stayed in California, he would additionally owe:
CA state tax (~13.3%) ⇒ ~$3.53 billion
So, purchasing Texas residency before vesting might have saved him over $3.5 billion in state taxes alone. For a deeper dive, see our page on state residency strategies.
Musk needs cash to cover the $2.24B purchase and $10.45B in taxes = $12.7 billion total. If shares trade at $300, he'd sell around ~42.3 million shares—leaving ~53.7 million shares locked up for five years. If you are approaching a large vesting or secondary, consider our checklist for planning before a major liquidity event.
Assume Musk holds the remaining ~53.7 million shares for 5+ years and they appreciate to $500/share:
Elon Musk’s new Tesla grant is more than headline-making wealth; it’s a sophisticated study in compensation design, tax arbitrage, and legal architecture.
From a corporate standpoint, Tesla retained its CEO, limited dilution, and created a future tax shield. From Musk’s perspective, he secured massive wealth while optimizing taxes, securing liquidity, and reinforcing long-term alignment.
If you’re navigating complex equity comp in your own organization or personal plan, know this: every checkbox—residency, vehicle structure, vesting terms, liquidity triggers, and tax timing—can be tuned for dramatically different outcomes.
Complex grants, hybrid equity, 409A risk, and residency timing—this is our wheelhouse. VIP Wealth Advisors builds integrated models so you can see cash needs at vesting, sell-to-cover impacts, and long-term after-tax outcomes before you sign.
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