Elon Musk’s compensation could tank Tesla’s earnings for years if they lose the appeal

While everyone has been hyper-focused on Elon Musk’s latest “gaudy” pay package, the one the board just awarded him to compensate for the previous package canceled by a judge in Delaware is turning into a financial time bomb ticking that could blow up Tesla’s income statements.

According to a new analysis from financial data tracker Troy Teslike, corroborated by a Reuters report, a Delaware Supreme Court ruling against Tesla would trigger a massive wave of stock-based compensation (SBC) expenses, enough to wipe out Tesla’s GAAP profits for nearly 2 years.

For those who haven’t been following the legal drama: A Delaware judge voided Elon Musk’s massive 2018 CEO performance award in January 2024. Tesla appealed that decision, and the Delaware Supreme Court heard arguments just last month.

We are currently waiting for a decision, which most legal analysts expect between late 2025 and early 2026.

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But here is where it gets tricky. In preparation for a potential loss in court, Tesla’s board approved a new “interim CEO award” in August 2025. This was designed to ensure Musk gets paid if the 2018 deal is officially dead.

If Tesla wins the appeal and the 2018 package is reinstated, everything is likely to stay the same financially. Tesla already booked the expense for that award years ago.

However, if Tesla loses the appeal, the 2018 award stays cancelled. The “August 2025 interim award” then immediately takes effect. Because this is technically a new award under accounting rules (ASC 718), Tesla has to recognize the expense from scratch. They cannot “carry over” the credit from the expenses they paid on the 2018 plan.

Troy Teslike broke down the numbers in a recent report, and the chart is startling:

“If that happens, Tesla would need to record the cost of Elon Musk’s August 2025 interim CEO award. This would push GAAP EPS into negative territory for seven straight quarters, starting in Q4 2025.”

According to Tesla’s own filings, the value of the 96 million shares in this interim award is roughly $23.7 billion, though Reuters estimates the hit could be as high as $26 billion depending on the share price when the grant becomes effective.

Because this is a “catch-up” expense, Tesla would have to book a massive chunk of it immediately after the ruling, and then spread the rest over the next 6 to 7 quarters.

The result? Tesla’s GAAP Earnings Per Share (EPS), the official profit number reported to the SEC, would likely turn negative and stay there until mid-2027, unless Tesla’s earnings trend, which has been down for 2 years, reverses.

It’s important to note that this impacts GAAP earnings, not Non-GAAP earnings. It’s a non-cash expense. Tesla isn’t writing a check for $25 billion; it’s printing new shares (dilution) and handing them to Musk. The actual cash flow of the company remains unchanged.

But for institutional investors and algorithms that trade on GAAP profitability rather than Non-GAAP, which claims to be designed to represent a company’s financials better, even though it almost always makes their financials look better, a sudden shift from healthy profits to deep losses “on paper” is a significant event.

As Reuters put it in their analysis, this single accounting event “could wipe out years of Tesla profits.”

Electrek’s Take

This is a classic case of Tesla’s governance issues coming back to bite them, but it’s also a reminder of how disconnected stock-based compensation can be from actual business health.

Now, I wouldn’t be surprised if the Delaware Supreme Court does side with Tesla and Musk.

I think the judge’s original ruling was fair and highlighted clear problems with how Musk’s compensation package came about, but the brain-dead shareholders voted for it again. They made their bed, let them lie in it.

But I’m no lawyer, and the judge determined that the revote was not a resolution.

Musk was successful in his campaign to scare companies away from being incorporated in Delaware, and it’s clear that it is putting pressure on the state. While technically the court shouldn’t take that into account, it’s often impossible not to.

Even though the court decision was to protect shareholders, Musk’s actual problem is that it doesn’t protect his personal interests.

Either way, I maintain that Tesla’s governance is abysmal and will ultimately be the root cause of the company’s downfall.