On a fateful September morning the world woke up to the news of WeWork pulling the plug on its IPO. WeWork, the co-working unicorn startup, whose IPO was one of the highly anticipated public offerings of 2019 saw an abrupt drop in its valuation. It filed for an initial public offering, disclosing a bevy of conflicts of interest and mismanagement by the team led by its Co-founder and CEO, Adam Neumann. The Company is trying to tempt investors with a cut-price deal that would value the loss-making property giant as low as USD 15 billion. The mooted valuation would be a sharp reduction from USD 47 billion attained during its last private fund-raising in January, this year. The decrease in valuation of the Company demonstrates a tale of failed governance, almost of the highest order, on verge of being fraudulent by giving the CEO massive power. Neumann's IPO dreams crashed and burned, and now he's been ousted as the CEO and observers are wondering whether WeWork can avoid bankruptcy.
Where they went wrong?
WeWork’s corporate governance issues are myriad, and the Company’s corporate structure is at the root of it. It has a multi-class stock structure that gives CEO more power than the company’s other stakeholders. Like many other tech companies that have recently gone public, even WeWork had a certain portion of stock that belonged to the founder and had much more powerful voting rights than others which led to more impact when it came to company decisions. WeWork, seems to have taken this tech company’s stereotype rather too seriously. Sure enough, WeWork’s dual class share structure gives Founder and CEO, Adam Neumann, total control of the company for the foreseeable future.
What raises more red flags for WeWork’s IPO is Neumann’s significant history of personally profiting off his position in ways that raise significant conflict of interest concerns. Major concerns were (i) owning buildings where WeWork is a tenant; (ii) borrowing from WeWork; and (iii) employing family members.
Absolute power corrupts absolutely.
The CEO owned three classes of shares, including those that will give him a close to 20 votes per share. As a consequence, Neumann had the ability to sell controlling interest in WeWork at his discretion. The other glaring issue was millions of dollars’ loan that was secured against his stake in WeWork and used it as a foundation to collect this huge amount from personal loans or WeWork stock sales.
Moreover, he has turned the company into something of a family business, putting several relatives in important roles across the business. That control has been so deeply embedded that it may even survive the CEO himself to an extent that if the CEO is permanently incapacitated or dies in the next decade, a three-person committee will have the power to decide his successor, a committee that interestingly enough includes Neumann's wife.
Duh! You had one USP.
WeWork made several attempts to convince the world that it is this start-up tech company and make that as its USP. However, it doesn’t have the significant qualities that a tech company is likely to imbibe at its inception, like low growth costs and a network effect, meaning the value of its product increases when more people use it. Recently, a number of IPOs have twisted the rule of corporate governance. Issuance of dual-class shares by giving total control to founders and preventing public investors from having a say is becoming a norm and defeating the purpose of investor protection.
While WeWork’s drama had reached an inflection point in recent days, the company had been a mess for a while. The warning signs were visible, but the private market largely ignored them and continued to pour billions of dollars into the company, with SoftBank leading the charge.
How much funding is ‘too much’ funding?
This debacle also raises questions about SoftBank and the funding environment for tech startups at large. SoftBank’s other crown jewel, Uber, also went through an executive meltdown in the approach to its IPO when former CEO and Co-Founder, Travis Kalanick, resigned in 2017. But even with new leadership, Uber has struggled on the stock market since going public and recently laid off 8% of its workforce.
The impression is that WeWork got the message that a stable and effective governance platform is critical to its reputation and, more importantly, to the success of its pending IPO. Start-ups and the venture capital money behind them need to pay special attention to the way the operating rules of the issuing companies are set up. The WeWork IPO is a real-life example of “the business case” that can be made for an effective governance.
Authored by Barkha Doshi (Associate) with inputs from Akshata Namjoshi (Senior Associate).
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