By Jeremy Siegel
WeWork, the popular company that allows small businesses to rent office space at affordable rates in many cities around the United States and the world, has been in the news for all the wrong reasons lately.
WeWork first filed papers in August for their initial public offering (“IPO”), and was ultimately delayed on September 16th, after being valued in August at an eye-popping $47 billion. Their filings with the SEC showed that out of the $436 million in revenue they made in 2016, they lost $429 million of it. In 2018, WeWork lost $1.6 billion on a total of $1.8 billion in revenue. The most staggering is that in the first six months of 2019, WeWork lost $690 billion on $1.5 billion in revenue.
The now former-CEO, Adam Neumann cashed out his stock in the company to the amount of over $700 million prior to the IPO. Neumann then became exposed generally as an odd person, and seemingly, one that should not be running a highly publicized startup up with a high valuation. It became known that WeWork once paid Neumann $5.9 million for the trademark to use “We” (this has since been given back to the company). A report by the Wall Street Journal, after the delay in IPO, revealed that Neumann once implemented a round of layoffs at the company, then followed it by tequila shots for the company and a concert by Darryl McDaniels of Run-DMC. Neumann stepped down from his role as CEO as of September 24th, but not without taking roughly $1 billion in cash that was owed to him and negotiated for before leaving.
Amid all the talks, controversies, absurdity, and articles that have been written about the hurricane that has become WeWork, there hasn’t been a ton on just how this could have even occurred in the first place. Let’s get a couple things straight. WeWork is a corporation. By its very nature, a corporation is set up and designed to function with the Board of Directors at the helm of the ship, making decisions in a fiduciary capacity, in the best interest of its shareholders. Was nobody asking questions when money was being burned through at such an excessive rate? Or when Neumann was using company money to buy a $60 million private jet?
Neumann has absolutely engaged in self-dealing, and merely stepping down in his role as CEO and walking away with a stock package is surely not going to be a sufficient remedy for the shareholders, which at this point is primarily Japan’s SoftBank. SoftBank has now invested over $18 billion into WeWork. As of late, SoftBank has put in $5 billion to help bail WeWork out of the mess they have become, and in an effort to hopefully triage the mess that Neumann has created.
Almost in a Fyre Festival type manner, Neumann was able to deceive, embellish, and fool people into believing that WeWork was this all-encompassing world and culture changing company, all while never showing a true profit on paper. What should the repercussions be?
I believe the SEC has an easy case to show Rule 10b-5 fraud, which deems it to be illegal for anyone to directly or indirectly take measures to defraud, make false statements, omit relevant information, or conduct operations of business that would deceive a person relating to transactions involving securities. The SEC has the ability to investigate and reference every public disclosure that Neumann has ever made, and cross-check the factuality of the statements. If it turns out that investors relied on those disclosures to make “sound” investments, then Neumann could be liable.
As I’m writing this, it’s reported that WeWork does not have the ability to even fire employees to save on cash – all because they don’t have the money to pay them severance packages.
Startup culture, in particular the Uber’s, Airbnb’s, and WeWork’s of the world, have a bad reputation for having elaborate visions of “changing the world.” These companies promote their visions all while happily taking millions upon millions of dollars at wildly exaggerated valuations without showing any true plan or strategy for returning the money to investors. It’s a problem that I think is finally being exposed to with the recent chaos surrounding WeWork. It’s a tough position for investors to be in (how can you not invest in the next “sexy” unicorn company that is preaching how they are “different”?), and it’s a tough position for young budding entrepreneurs, who are trying to distinguish themselves in a competitive environment.
This problem can only be solved through reigning in expenses on all fronts and regular checkups with financial analysts and advisors to the company. Yoga classes for pets and free kombucha on tap at work are not necessary when you’re playing with borrowed money and time – and I think investors need to make that absolutely clear to avoid these situations in the future.
For more satirical, and downright funny writing on the topic and other technology industry news, please see NYU Stern School of Business professor Scott Galloway’s blog, here.
Student Bio: Jeremy Siegel is a third-year student at Suffolk University Law School and Production Editor for the Journal of High Technology Law. He graduated from Roger Williams University in 2012 with a Bachelor of Science in Business Management.
Disclaimer: The views expressed in this blog are the views of the author alone and do not represent the views of JHTL or Suffolk University Law School.