The risks facing X

Yesterday, employees at X received a crash course in private equity from the folks at Morgan Stanley, whose Shareworks platform is being used to manage the restricted stock units that Elon Musk has finally begun doling out.

The issuance of new equity, complete with an official stockholder agreement and disclosure statement, marks the beginning of a new chapter in the saga of Twitter’s haywire transformation into X. The old Twitter, a publicly traded company incorporated in Delaware with an independent board of directors, has been dead for a year. In its place now is X Holdings, a private, Nevada-based corporation with one controlling shareholder and a PO box in Austin, Texas.

If the transcript I published of X’s all-hands with Musk and Linda Yaccarino last week wasn’t clear enough, the internal equity documents solidify that Musk, X’s “Principal Stockholder,” calls the shots. He’s the company’s “sole director” who controls all decision-making through a special class of shares. He can hire and fire board members, should he decide to create a board.

Despite her CEO title, Yaccarino is mentioned in X’s lengthy list of risk factors only once, where it’s noted that she is focusing on “business operations” and that the company’s “reliance on a small number of executive officers reduces our ability to quickly and successfully respond to any unforeseen or significant issues.”

The reason for these documents being shared with employees (and now me) is that Musk has finally acknowledged what he thinks X’s equity is now worth: $19 billion, a 55 percent drop from his $44 billion purchase price. Since promising employees new stock awards since he took over, Musk had yet to follow through with the details until this week.

Private companies typically price the shares they give employees as low as possible since that gives the most potential upside. But this is Musk, of course. He didn’t follow the typical playbook of using an external auditor to arrive at $19 billion. He also didn’t bother to register X’s shares with the SEC (an agency he hates), which presents other complications for employees, including future tax implications that could be quite messy.

Based on how the stock market has treated money-losing tech companies this year, $19 billion is quite an optimistic number. When you consider how X’s revenue has collapsed and the roughly $13 billion in debt Musk took on to help finance the acquisition, well, yikes. (The only investors who will regularly get to see the company’s financials are those who put in $250 million or more: Sequoia, Andreessen Horowitz, Aliva Capital, VvCapital, Binance, Brookfield, Fidelity, Larry Ellison, and the Qatar government.)

One theory floated to me by an investor who knows Musk is that an inflated valuation means that he gets to issue fewer shares to employees since they are being awarded RSUs based on a previously communicated dollar amount. By using a higher valuation, fewer shares need to be issued, offsetting Musk’s dilution.

Another theory is that Musk wants to keep his investors, which include longtime friends like Ellison and Sequoia’s Roelof Botha, from having to more aggressively mark down the value of their investment. If Musk, the richest man in the world, says X is worth $19 billion, that’s all that matters?

For now, sure. But a private company’s valuation is ultimately whatever management thinks someone will pay in the future. Musk has said that he wants to model X’s compensation structure after SpaceX, which conducts regular tender offers so employees can sell their vested shares to outside investors and get some liquidity.

Perhaps Musk knows people who will buy X equity at $19 billion in the near future. Nothing about a buyback was communicated to employees this week, flummoxing some. The stockholder agreement only mentions the possibility of the shares, which have a seven-year timer before they expire, being cashed out in the event of an IPO or acquisition.

The risk factors X shared with employees this week are intentionally meant to spell doom and gloom. Similar disclosures are common in SEC filings by public companies. The reason they exist — to help protect management from shareholder lawsuits — means they are often the most sober look you’ll get at the problems facing a business.

If you’ve been following the news about X closely, a lot of these won’t come as a surprise. But still, it’s nice to hear from the horse’s mouth:

I published a Q&A with execs from Figma and Adobe in last week’s issue. We talked about how the regulatory review of the deal has taken longer than the two companies expected. Adobe is on the hook to pay Figma $1 billion if its $20 billion acquisition doesn’t close, and the clock is ticking.

On that note, after the interview was published, I received this message from one of Figma’s competitors:

“We’ve got either interviews or paperwork from the Department of Justice, the UK’s CMA, and Korea. Other competitors get contacted by the EU. It’s going to be a long, long process.”

A roundup of what else happened in the tech industry this week that you may have missed:

Some interesting career moves I noticed this week:

I’ll be back next week. In the meantime, send me your feedback, story ideas, and personal risk factors. Thanks for subscribing.