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?
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.
We're excited to announce a new partnership with Pulley, one of the most popular equity management solutions for startups. Thousands of startups use Pulley to create cap tables, secure 409A valuations, and access essential tools for equity management. Pulley is the top-rated cap table solution on G2 and is used by more than 70% of each Y Combinator batch.
Starting today, you'll be able to automatically create a cap table for your startup on Pulley using information from Clerky. Your cap table on Pulley will also automatically update as you issue more shares, stock options, safes, or convertible notes on Clerky.
As a startup attorney, I’ve seen firsthand the challenges startups have with cap table management. Pulley is one of the most popular cap table services with our startups, so we're thrilled to be making it easier for them to get set up on Pulley.
Darby Wong — Co-Founder and CEO of Clerky
In 2011, I was in the same Y Combinator group as Clerky. The founders personally helped me set up my company quickly, saving me thousands on legal fees. I've used Clerky for every company I've started. It's not surprising that Clerky has become the default for so many companies today. I'm excited for Pulley to partner with Clerky and make it easier for more founders to start and scale.
Yin Wu — Co-Founder and CEO of Pulley
To get started, go to the Integrations page for your startup's team on Clerky. Then just go to the Pulley integration and click Install. Once you've connected your Clerky account, Pulley takes care of the rest, syncing your data and setting up your cap table.
That's not all! If you don’t already use Pulley, you'll get 15% off your first year when you sign up through this integration.
We’re excited to work with Pulley to make life even easier for startup founders. This new integration means that Clerky startups will be able to use Pulley's advanced equity management tools without the repetitive data entry. We hope you'll enjoy using it!
We're excited to announce an enhancement to our partnership with Mercury (plus a limited-time offer) that will significantly reduce stress for non-US startup founders — and even some US founders!
If you're a new founder and someone agrees to invest in your startup, you may need to quickly set up a new corporation and open a bank account. Naturally, you want to close the investment as soon as possible. Or maybe you're in a little less of a rush but still need to accept payments or pay employees soon.
Clerky has always made it easy to set up a corporation so you can get the first step done quickly. We've also long partnered with Mercury and others to make that second step, opening a bank account1, as easy as possible. Trusted by more than 100,000 companies, Mercury lays the groundwork for ambitious companies to operate at their highest level with banking and credit cards engineered for the startup journey. With an intelligent banking platform powering their operations, founders and finance teams can efficiently store, manage, and move their funds while driving smarter business decisions. And with access to notable investors, operators, founders, and resources, startups can better navigate the obstacles of company building.
But sometimes startups encounter a roadblock when trying to take this second step. In order to open a US bank account, you generally need to get an EIN from the IRS. If you have a US taxpayer ID, you can probably get an EIN online in just a few minutes. But if you don't have a US taxpayer ID, you'll need to apply by fax. Sometimes you'll need to apply by fax even if you do have a US taxpayer ID. The problem is that the IRS can take months to assign EINs via fax, which means it could take months to open a bank account. That's bad news if you have an investor waiting.
To fix this, we're teaming up with Mercury so you can open a Mercury account while waiting for the IRS to assign your EIN. Clerky startups can now start applying to Mercury through Clerky right after applying for an EIN! This means you can potentially start banking within days of incorporating. No more stressing about when the IRS is going to get back to you. You can now start closing investors, accepting payments, and hiring people in days, not weeks or months.
One more thing — for a limited time, Mercury is helping cover a portion of incorporation costs by offering $1,000 in cash to Clerky startups that open accounts and deposit at least $20,000!2 This offer won't last forever, so if you're interested, get started today on Clerky.
Starting today, non-U.S. founders incorporating on Clerky will be able to apply for an EIN completely online — and for free.
In most cases, U.S.-based startup founders can get an EIN from the IRS website in minutes. Startup founders outside of the U.S. usually can't do this though, because the online application requires an SSN or ITIN. If you incorporate in the U.S. but don't have a personal U.S. taxpayer ID, your only option aside from snail mail is to fax an application to the IRS and wait to receive the EIN back by fax.
Obviously, this is a huge pain. Where do you even find a fax machine these days?
Clerky startups in this situation can now avoid this hassle entirely. Answer a few easy questions to generate the EIN paperwork and have Clerky fax it to the IRS. When we get the EIN back, we'll upload it and notify you immediately. Please keep in mind that the IRS can be very slow to process EIN applications by fax. It can easily take months in some cases. Unfortunately, there's no way to speed this up (believe us, we've looked).
We're especially proud of our new EIN functionality because it's 100% in-house, not outsourced. Even though it's very common to outsource handling EIN applications, we decided to do the work ourselves in order to minimize the risk of delays or data breaches. We've also worked hard to make sure that you can fully comply with IRS instructions when you submit an EIN application through Clerky. Surprisingly, this isn't the case with a lot of other services that help startups with EINs.
If you're incorporating a startup and don't have an SSN or ITIN, we hope you'll enjoy this new feature. We look forward to making your life easier!
What's new in our software:
- We've given your perks directory a whole new look. It's now easier than ever to see all your perks and find the ones you want for your startup.
- You now have more fine-grained control over who reviews and gets cc'd on paperwork. Now, when you set someone to always review or observe paperwork, you can set whether that should be for everything or only some kinds of paperwork. No more manually removing people each time!
Plus, we've added some new perks:
We're thrilled to announce a brand new help center just for attorneys and paralegals!
More attorneys than ever are using Clerky to help their clients. We realized there was a need for a dedicated space where attorneys and their staff could find answers to their questions. With our new help center, it's now easier than ever for attorneys and paralegals to learn how to use our software.
So what's inside the help center? We've provided detailed answers to common attorney questions, with step-by-step instructions, screenshots, example scenarios, and video tutorials. You can peruse articles by category – for example, "Teams" or "New Clients" – or you can search the help center for your particular question. Many articles also include how-to videos that will guide you through our UI.
If you're a startup founder, this new help center is great news for you, too! You now have a place to direct your legal team when they have questions about Clerky. Help them get up to speed faster than ever, so you can get back to building your startup.
Ready to learn more? Check out our new help center now!