A jury in a Los Angeles Superior Court has ruled that Meta and YouTube are liable in a social media addiction lawsuit, prompting responses from the plaintiffs' families and their attorneys.
The timing could hardly be worse. On Tuesday evening, Meta Platforms Inc. publicly disclosed a new equity incentive plan for its top executives. The full vesting of these incentives is contingent upon the company's market capitalization rising from its current $1.5 trillion to over $9.4 trillion by 2031. Merely hours later, on Wednesday, an exclusive report revealed that Meta is planning to lay off hundreds of employees. A few hours after that, a jury in Los Angeles delivered a verdict, finding both Meta and Google's YouTube negligent and liable in a lawsuit concerning social media addiction.
It is not unreasonable to think this court ruling could negatively impact Meta's future stock price. As my colleague Wu Ailin wrote ahead of the trial in late January, this case is the first of thousands of similar lawsuits. The plaintiffs' families accuse the companies of deliberately designing addictive products that harm the mental health of young people. The ruling is widely expected to set a precedent for all similar cases and could even lead to a global settlement.
So far, investors do not appear overly concerned. Within an hour of the verdict, the stock prices of both companies fell only slightly, and the court-awarded damages were lower than some market expectations. However, investors may be overlooking a more critical issue. As Wu Ailin pointed out in January, the legal precedent set by this case could expose social media companies to a new scope of liability. Furthermore, the implications of this precedent could extend to new technologies, as some AI companies are already facing lawsuits over harm caused by AI chatbots.
Even more importantly, Meta's future value remains highly dependent on its social applications' ability to retain users. In fact, based on statements from Meta executives, the company aims to use AI to make social feeds even more precisely tailored to individual preferences than they are now. Therefore, regardless of the final compensation Meta and YouTube must pay for past actions, this case could constrain the future business strategies of both companies.
**Meta's Equity Incentive Plan**
Even before Wednesday's court ruling, the substantial stock option incentives disclosed by Meta in a securities filing on Tuesday evening appeared somewhat like "showy compensation." For these options to hold any value, Meta's stock price would need to nearly double by 2031, rising above a minimum exercise price of $1,116 per share. While not impossible, this is far from certain.
The condition for the incentives to vest in full is for the stock price to reach $3,727. If Meta's stock were to achieve such a staggering increase, top executives—including CFO Susan Li, CTO Andrew Bosworth, Chief Product Officer Chris Cox, and COO Javier Olivan—could each potentially gain nearly $800 million from these options. Of course, these options could also expire worthless.
What is the purpose of this? Mark Zuckerberg seems to be emulating Elon Musk, projecting extreme confidence in the company's future. Musk frequently touts Tesla's future valuation, having recently stated that a $100 trillion market cap for Tesla is "not impossible." Last fall, the electric vehicle manufacturer also approved a restrictive equity award for Musk. This award could be worth up to $1 trillion if Tesla achieves a series of targets over the next decade, including reaching a market capitalization of $8.5 trillion. Is it a coincidence that Meta's target market cap is nearly $1 trillion higher than Tesla's?
Given the significant challenges both companies face, it is highly risky to speculate on which is more likely to achieve its goal. Tesla is attempting to transform into a robotics and autonomous taxi company, and it remains uncertain if Musk will succeed. As for Meta, Zuckerberg is investing heavily in AI, yet beyond scaling its already massive advertising business, there is no clear path to profitability from these investments. Meta's weak stock performance over the past year suggests investors are not optimistic.
Even if these options ultimately become worthless, there is no need to feel sorry for these executives. Each earns an annual salary of nearly $1 million, with cash bonuses of a similar magnitude, and they receive new restricted stock unit awards each year, typically worth tens of millions of dollars. This stock option incentive is in addition to their regular restricted stock awards. In other words, these options are merely the icing on the cake—and extremely lavish icing at that.
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