Risk and Hard Work Precede Achievement and Financial Rewards

Feb 6, 2024

The Kansas City Chiefs traded up in the NFL draft in the spring of 2017 paying, what was viewed by many at the time, as a steep price for an unproven professional talent to obtain the rights to Patrick Mahomes (https://www.nfl.com/news/chiefs-trade-up-for-qb-patrick-mahomes-at-no-10-0ap3000000803405). Seven seasons later the Chiefs will be making their fourth trip to the Super Bowl this Sunday with Patrick Mahomes leading their offense seeking their third Vince Lombardi Trophy as the NFL’s best team (https://www.sportingnews.com/us/nfl/news/patrick-mahomes-super-bowl-record-tom-brady/a18baee34b9a82c223c8b3cd) during his six year tenure as their starting quarterback.  In July 2020, Mr. Mahomes signed a ten year contract for $450 million based on his performance (https://www.cnn.com/2023/09/18/football/patrick-mahomes-record-contract-deal/index.html). The Chiefs are not complaining this February about the nearly $53 million they will pay him for this season.  Mr. Mahomes performance warrants that type of compensation in his industry.

During a similar time period, 2017 – 2023, Elon Musk led American automobile manufacturer, Tesla from $11.76 billion in revenues to $96.77 billion (https://stockanalysis.com/stocks/tsla/revenue/), a truly championship level performance in the auto industry.  In comparison, General Motors saw their revenues increase from $145.59 to $171.84 billion over the same period (https://www.macrotrends.net/stocks/charts/GM/general-motors/revenue) and Ford saw their revenues increase from $156.78 to $174.23 billion (https://stockanalysis.com/stocks/f/revenue/).  In 2018, the shareholders of Tesla agreed to a performance based compensation package for Mr. Musk to lead their company  (https://corpgov.law.harvard.edu/2018/05/22/elon-musks-compensation/).  Many at the time felt the incentive-based compensation package had unachievable thresholds for significant compensation (https://youtu.be/NEKsTiEthRA?si=KfXLRRY2pRzPitSP).  Mr. Musk did not seek a salary or any compensation unless he delivered the performance outlined in the agreement. Despite numerous obstacles and challenges, Elon Musk exceeded expectations as the CEO of the company (https://www.forbes.com/sites/qai/2022/09/29/tesla-a-history-of-innovation-and-headaches/?sh=5f930bf21873) and earned the complete compensation package.  Unfortunately, this paid on performance agreement made in good faith between Mr. Musk and a significant majority of the company shareholders was voided by a Delaware Court recently (https://corpgov.law.harvard.edu/2024/02/01/tesla-musk-case-post-trial-opinion/).  This court ruling sets a dangerous precedent if it is not overturned on appeal.

The foundation philosophically of the American economy is the commonly held belief that if a person has knowledge, ability, works hard, takes the necessary risk, and executes that they will have the opportunity to climb the nation’s limitless ladder of opportunity available to everyone equally in the nation regardless of their demographic group or economic class of origin.   Success stories verifying this to be true can be found in every sector of the economy from food service to agriculture and from athletics to manufacturing.  Our meritocracy offers equal opportunity not equal results.  The field is leveled for all through programs like Small Business Administration backed loans that do not require collateral for approval and can supplement personal investment providing up to 90% or more of the total investment package needed.

Unfortunately, states like Delaware, Washington, and Oregon are taking steps to erode entrepreneurial confidence in them as corporate headquarters. The impact of these decisions can be far reaching in terms of employment opportunities, real estate development, and tax revenues generated to support social safety net programs.  Mr. Musk is considering reincorporating Tesla in Texas based on the ruling (https://www.wsj.com/business/tesla-to-hold-shareholder-vote-to-incorporate-in-texas-elon-musk-says-8eb78eef).  It would not surprise me if the era of Delaware being attractive for incorporation nationally is coming to an end. Washington has historically been an attractive state for business start-ups, incorporation, and operation of privately held and publicly traded companies.  The lack of a state income tax, technology forward environment, cheap energy, and multiple deep water Pacific ports all have contributed to this elite status with a resultant strong state economy.  Unfortunately, the government in Olympia elected to recently create a state capital gains tax without engagement with the citizens of the state for approval.  A referendum to repeal this undesired tax will likely be on the ballot in November (https://www.geekwire.com/2024/initiative-aiming-to-repeal-washington-state-capital-gains-tax-passes-key-milestone/).  I encourage everyone to vote to eliminate this entrepreneurship and employment deterring tax.  For the unfamiliar, a capital gains tax assesses a tax on entrepreneurs and shareholders when they sell assets in the future.  The tax provides no capital gain tax credits for businesses that fail or employees who contribute “sweat equity” to company start-ups in exchange for stock that do not reach critical velocity (https://www.upsilonit.com/blog/startup-success-and-failure-rate).  Federally, business owners already are taxed at a capital gains rate of up to 23.8% on the sale of the intangible assets of their businesses. Businesses in local economies generate payroll, sales, excise, and property taxes throughout their lifespans regardless of ownership.  There is no reason to tax retirement assets of entrepreneurs at a state level, they should instead receive gratitude for investing in and enhancing the communities they and their employees call home.  Some advocates for the Washington capital gain tax say it only impacts a small percentage of the population. To those individuals I say that may be true, but if job creators move to Alaska, Nevada, Texas, or Florida, will the same job opportunities be created in Washington in the future. I also say the year I was born, the state sales tax rate in Washington was 4.5%.  This year purchases in Seattle carry a 10.25% sales tax burden. Evidence that once a tax is put in place it rarely goes down and typically grows to impact more people over time.

A person only needs to drive on I-5 between Washington & Oregon to see the impact state income and capital gains taxes can have on businesses.  The growth of the Clark County economy in Washington has been significant in recent years, while the impact in Multnomah County in Oregon has been regressive in the same Portland metropolitan area.  Politicians in Portland, Oregon are beginning to recognize the negative stimulus taxes have on entrepreneurship and appear to be revisiting their tax code in 2024 (https://www.bizjournals.com/portland/news/2024/01/11/business-tax-rate-preschool-for-all-housing.html), a positive sign.

IBA has been advocating for the Pacific Northwest entrepreneurial community since 1975.  As a business & franchise brokerage firm, we help entrepreneurs receive good market values for their privately held companies and family businesses in transactions facilitated in environments of confidentiality employing best practices.  In addition, we have the ability to sell buyers quality, mature, profitable businesses, and vetted new franchise opportunities.  All conversations with IBA are held in strict confidence.  100% of IBA’s compensation is performance dependent and payable upon project completion.

We all need to fight for what is good in America.  Freedom of speech, religion, and the ability to pursue the American Dream of seeking occupational fulfillment and prosperity without limits are issues worthy of fighting for as a people.   Patrick Mahomes received three scholarship offers (https://www.espn.com/college-sports/football/recruiting/player/_/id/172398/patrick-mahomes) to play college football out of high school.  How many ranked above him that year never played in the NFL or won a Super Bowl?  Elon Musk changed the automobile industry through the creation of Tesla.  Positive achievement should always be celebrated in America. The market, not the government, should determine what people’s ideas & performance are worth.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.