WeWork’s rise and fall has made for some of the most spectacular financial theater in years. At the center of the problem is Adam Neumann, the company’s founder and CEO.
Neumann, who once mused about becoming the world’s first trillionaire, still managed to come out a winner, even as his company began to fall apart. His antics may have far-reaching consequences.
From unicorn IPO to emergency bailout
While Neumann behaved as if his loss-making business was his own personal ATM, investors started to get worried ahead of WeWork’s initial public offering. Numerous revelations emerged about his questionable, self-dealing practices, including his decision to extract a $5.9 million payment from WeWork in order for it to use the “We” trademark when it rebranded as the We Co. last year. Apparently, his ownership of a personal holding company, We Holdings LLC, was sufficient justification to claim the copyright for an essentially un-copyrightable name.
Ultimately, the music stopped when the IPO fell apart. WeWork was so financially strained that it would have run out of cash by the end of October, had leading shareholder Softbank Group Corp. not swooped in with a bailout.
However, Neumann was not done extracting cash from his wounded company. In order to get him to walk out the door, Softbank agreed to pay the ousted CEO a staggering $1.7 billion.
CEO rent-seeking at its worst
Bloomberg’s Matt Levine offered this remarkable assessment of Neumann’s eye-watering golden parachute:
“A lot of kids starting at Harvard Business School next fall will be hanging up posters of Adam Neumann in their dorm rooms. Neumann, the founder of WeWork, will walk away from this corporate bonfire with a billion dollars and a bunch of fancy houses. His great-grandchildren will be prominent philanthropists with their names on museums and universities, the strange origin of their fortunes long forgotten. Neumann did a certain sort of capitalism—one with some cachet at HBS!—as well as anyone has ever done it. It is one thing to build a successful company that creates a lot of value and take some of that value for yourself; Neumann created a company that destroyed value at a blistering pace and nonetheless extracted a billion dollars for himself. He lit $10 billion of SoftBank’s money on fire and then went back to them and demanded a 10% commission. What an absolute legend.”
While his actions may have been “legendary” in the sense that he got off scot free with a huge payout, Neumann’s escape from harm could prove dangerous to the integrity of capital markets.
A black mark for startup culture
At the same time Neumann was receiving his golden handshake, thousands of employees – dozens of whom were paper millionaires a month ago – were getting the boot. WeWork is struggling to retrench financially in an effort to stave off a life-threatening liquidity crisis. Unsurprisingly, these layoffs have further tainted perceptions of Neumann and his Softbank benefactors.
Neumann’s astonishing golden parachute has earned widespread condemnation from commentators and investors. Neumann lived large on WeWork’s dime and then took a big payout to leave his sinking ship. That is an ugly story, one that will stick to Neumann, Softbank and WeWork for a long time. It may also risk tainting all startups, as venture capitalist David Sacks observed last week:
“The magic of Silicon Valley is that all employees participate in success and honorable failures are quickly forgiven. But when founders extort obscene payments while employees are fired by the thousands, it invites regulatory scrutiny, imperils the system, and destroys the magic.”
Employees need to believe in their managers, especially in an early or growth phase of development. Unfortunately, unscrupulous leaders can take advantage of faith for their own narrow benefit.
Verdict
Relying on the CEO or founder’s vision can prove an asset, but also a liability when the particular leader is more interested in feathering his own nest than taking care of his business or his team. For thousands of workers to lose their jobs even as Neumann cashes out a billionaire represents a potential crisis for market integrity. If people do not believe the market can provide a degree of economic justice, they will abandon it. That is bad news for all investors.
Disclosure: No positions.
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