Cramer described the settlement as a "deal of a lifetime," and said Musk made a huge mistake by not taking it.
"He must be going for some insanity defense," Cramer said on "Squawk on the Street." "That kind of deal. I mean that is the sweetest deal ever."
Thursday evening, Tesla and the company's board issued a statement backing the CEO, saying Musk has "integrity," and his leadership "has resulted in the most successful U.S. auto company in over a century."
After Musk apparently smoked weed and drank whiskey during an interview on comedian Joe Rogan's podcast earlier this month, Cramer suggested Musk should go on medical leave.
Musk had been acting erratically for months even before the take-private tweet.
In May, Musk rudely cut off analysts on Tesla's first-quarter earnings call. He apologized during the second-quarter call in August.
Musk was also launching tweetstorm after tweetstorm all summer as he was dealing with production problems for the company's new, less-expensive sedan, the Model 3.
Tesla and Elon Musk's wild August — in nine minutes