SpaceX is planning to go public in mid-June with a governance structure that would free Elon Musk from constraints on his power. Many investors regard Musk’s talents so highly that they might be willing to overlook this lack of constraints. In their view, freeing Musk from constraints would not be a bug but a beneficial feature. However, the loosening of constraints on Musk’s power should be viewed as troublesome even by his most fervent admirers.

(We wrote a post earlier about this subject based on media reports published prior to the release of the SpaceX prospectus. Now that the prospectus has been released, the discussion below updates and further develops our earlier critique.)

To understand the governance problems of SpaceX, it is important to distinguish among different types of investor beliefs about Musk. One set of investors views Musk as having the best ability to maximize the size of the SpaceX pie (that is, the total value that the company will generate to be shared among its shareholders). Such investors might favor governance provisions that would enable Musk to set company strategy with minimal interference from outsiders.

However, there are at least four aspects of the IPO structure that should nonetheless trouble these Musk admirers. First, a belief that Musk knows best how to maximize the pie does not necessarily imply any belief about how Musk would split that pie between public investors and himself.

A major role of corporate rules and governance arrangements in public companies is to constrain the extent to which insiders can split the pie in their favor. The design of the SpaceX IPO — namely, the company’s incorporation in Texas combined with the wide array of provisions in its charter — would give Musk expansive freedom not only to set the company’s strategy as he sees fit but also to allocate the pie as he wishes.

Among other things, Musk would be free (by an explicit provision of the charter) to take for himself any business opportunities presented to SpaceX. He would also be able to arrange related-party transactions that would benefit himself at the expense of public investors, sell himself a large fraction of SpaceX’s assets at a favorable price, and secure giant pay awards. Musk would be able to make such decisions in ways that would confer very large private benefits on him; he would then obtain a substantially disproportionate slice of the pie, leaving public investors with considerably less than their pro rata share.

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