SEC fines Zenefits and former CEO for misleading investors | Hacker News Reader

SEC fines Zenefits and former CEO for misleading investors

buzzfeed.com

130 pointsrunesoerensen70 comments

It's interesting that I can't think of any of these megagrowth tech startups that have gone off without a hitch. Zenefits, Uber, Snapchat, etc. are all in some form of trouble or another, and yet these companies are supposed to be the shining success stories that all other tech startups aspire to.

Lyft, Spotify, Snap, SpaceX, to name a few.

Snap can't be both! :D

Give any company enough time. If you want to describe four strategies a company has used to become a shining success, your list could be Microsoft, Microsoft, Microsoft and Microsoft. If you want to describe four ways a company has really screwed up and was punished by the market and/or the government, your list could also be Microsoft, Microsoft, Microsoft and Microsoft.

You can probably replace Microsoft with Apple or Google without much trouble too (but it's trivial for Microsoft).

Sure, but companies like Snap or Twitter are much easier to poke holes at. They both tried their best to screw over a legit co-founder. Sadly Twitter succeeded.

Both already had some toxic people near the beginning of their time. I'd say that makes them a toxic company from the get go too. You can't say the same thing for a ton of other companies. In these cases we didn't need to give much time at all. I think that's an important distinction.

SpaceX is not a traditional VC funded tech/ software business.

Snapchat has a negative P/E ratio. In other words they are hemorraging money.

I can't speak as much to Spotify and Lyft, but I don't remember them being very profitable either. Or at least profitable enough to warrant their valuations.

Neither are any of the shining examples cited above.

...yet these companies are supposed to be the shining success stories that all other tech startups aspire to. reply

A lot of people in this world, as you can see on most threads on this site, define "good" as "financially successful,” and care only about getting a piece of the action. In that regard, it doesn't matter if it's legal, quasi-legal, a shitty scam or any permutation (see ICO's) if you see yourself as smart enough to get rich from it.

I don't think that's really the case here, HN doesn't seem to have many kind words for the makers of sham ICOs. How you get rich matters - if it's from making a huge business that's generally helpful, people admire you much more.

“How you get rich matters...”

Peter Thiel. The Bushes. Bill Gates. George Soros. Warren Buffett. IBM. Bayer.

What's the point you're trying to get across?

How you get rich doesn’t matter to many people, especially those “strivers” like so many here hoping to become rich themselves. People don’t tolerate the likes of Thiel, Weinstein, Etc because they’re decent people... it’s just money and power.

Edit: Do you have a point?

> How you get rich matters

It really doesn't. There is a very narrow set of circumstances that would aversely affect your place in society based on how you earned it.

Just think about how often it actually comes up regarding the wealthier people you may know or have heard about. Your wealthier neighbor.

Odds are you never dug for all the civil litigation they encountered, or the relative morality behind each case or circumstance.

They are just wealthier and society will reward them for that in perpetuity with access to better housing, better schools, better healthcare, and even more capital. End of discussion.

Even simpler, plenty of 9 figure tech folks sold companies that quickly got written off by their acquirers.

People definitely judge someone based on how they made their money. Look at trust fund kids, for a trivial example.

I'm not saying there aren't a number of advantages to being wealthy, there certainly are.

The Bushes made their money smuggling drugs, two presidencies later I’d say they’ve overcome the stigma. Papa Kennedy was hardly a saint, and JFK was alright.

The reason to be skeptical of the "shining success story" ideal is the underlying, incorrect assumption that success is about being free of faults.

Success is about achievement far in excess of the average. When a change is massive, it usually hurts someone. Sometimes things that seem really positive, like facebook helping kids stay in touch, contain massive negatives, like amplifying polarization in society.

That's why we need to evaluate these things with more nuance. Just because Google's search engine is a massive boon to internet users doesn't mean none of their businesses should ever be regulated. Just because Uber's culture is misogynist doesn't mean taxi licensing is great policy.

And if you succeed in doing something massive, remember that it isn't permanently good, and doesn't make you permanently good.

"helping kids stay in touch" doesn't sound "really positive". I don't know if that was your intent.

> Sometimes things that seem really positive, like facebook helping kids stay in touch

..with Facebook's mass surveillance and manipulation apparatus.

How about Slack ($5bn) and Stripe ($9bn)?

That being said, when you get that big, of course there's problems. You have targets on your back, you're managing thousands of people, etc. Especially if you're entering into a market with regulations... someone is going to fight back.

Fraud and problems should be seen as two different things.

This looks like a clear case of fraud. lying to investors and regulators. That isn't a "growth problem" from having a target on your back, its a legal/cultural/approach issue that probably existed from the start and grew large enough to bite you in the ass.

gentle/kind souls don't usually want to be CEOs/leaders and accept that stress and risk. People who are cutthroat and willing to step on other people to get ahead DO want to be CEOs.

such is life

Sorry but we live in a country that has rules and regulations for what CEOs and leaders do - regardless of how "cutthroat" they are. Their ambitions do not forgive their transgressions, and we have no obligation to accept that as "life". I do not see such behavior to be the essence of life, and I find it concerning you're so willing to accept it as the natural order.

We as a civilization are two missed meals away from chaos. When that happens, there will be those who eat and those who starve.

Laws are just there to compress the variance of outcomes. Where as in the past you would've starved, today you just struggle to get by.

There is a long storied past of humans banding together. The "kill or be killed" narrative is just a narrative.

Any examination of sociology, anthropology, and history shows a rich, long history of humans helping each other through peril, banding together in the toughest of times, and cooperating. It is by far our most recognizable trait as a species, and it appears in isolation whenever humans are together. I do not buy that there is some primitive animal culture that we will revert to if the Internet went down. There are humans who have never experienced "civilization", and they do not live in chaos and evil so I don't buy your argument at all.

Do we really have that sort of system, though? This company and its former CEO just got fined just shy of $1M combined. Is that a deterrent or an added cost of doing business? I think it's the latter.

And I wonder how much the SEC spent in manpower to arrive at this outcome. I can't really remember the last time any of their enforcement actions ended up as anything significant.

I don't understand the endgame for slack. It's a chat app with some good features and some annoying features. It's easier to write integrations against, I've heard? Where's the $5B value in that?

Umm. What endgame? They get away with charging $6.66 / month / user for the most popular organizational chat application in existence.

After email, of course.

They can only charge $6.66/month until a competitor comes along that creates a better and/or cheaper product. Unlike Facebook, which has a lot of inertia because all your friends may be on it and you can't get them to switch, a company can easily switch all its employees to a different corporate chat app: the CEO orders it, and it's done.

Also, that $5B valuation is based on significant expectations of future growth. Their customers up to now are probably the low-hanging fruit of the market - tech companies whose culture embraces tools like Slack. To grow beyond that (e.g., to Fortune 500 companies), they may need to offer a significantly different product that's sold in a very different way. Or, those companies may not want such a product at all.

Corporate chat apps are much stickier than that. After a while you integrate them into other services, build workflows on them and they become part of how your business functions. The specifics of what they integrate with and how determine what workflows you can build and how they work, which means these services are not fungible. Changing over can be very painful and costly.

Slack has raised insane amounts of money at really good terms just because they can. The funding world is insane right now and they are taking advantage.

They can easily do what Facebook or Oracle did and just buy up any competitions with their huge warchest.

You can't always buy out your competitors. Facebook itself is an example of this, having turned down numerous acquisition offers (including one from its competitor MySpace, and then one from the company that bought MySpace):

http://www.businessinsider.com/all-the-companies-that-ever-t...

There's a ton of dirt on Stripe. Info in my comment history, I won't dig it up.

I was curious, so I searched a bit. No mention of stripe at all within the past 372 days of your comments. Mind sharing now that you've piqued my interest?

It appears he had a bad experience with them:

https://news.ycombinator.com/item?id=11833815

and is writing a book about it:

https://news.ycombinator.com/item?id=12749364

I didn't have a bad experience with them. I clean up their mess on the regular. It's a steady source of income for me — you know, people who rely solely on their payment processor to protect them from fraud.

They don't care to do any sort of diligence about who opens an account. Someone, like a fraudster, can use a demo template for Woocommerce, apply and be accepted, only to clean out other people's cards en masse and zero intent to operate as a legitimate business.

How far back do we have to go? I know this isn't reddit, but can't help but feel like this is a joke since there's nothing in 2017.

It doesn't help that VCs actively promote and foster founders who behave in ways that would get themselves in trouble. I guess in the case of Zenefits misleading investors is a rule that doesn't "matter".

4. Naughtiness

Though the most successful founders are usually good people, they tend to have a piratical gleam in their eye. They're not Goody Two-Shoes type good. Morally, they care about getting the big questions right, but not about observing proprieties. That's why I'd use the word naughty rather than evil. They delight in breaking rules, but not rules that matter. This quality may be redundant though; it may be implied by imagination.

Sam Altman of Loopt is one of the most successful alumni, so we asked him what question we could put on the Y Combinator application that would help us discover more people like him. He said to ask about a time when they'd hacked something to their advantage—hacked in the sense of beating the system, not breaking into computers. It has become one of the questions we pay most attention to when judging applications.

http://www.paulgraham.com/founders.html

Yep.

And the googlepleasehire.me[1][2] guy was their VP Marketing through this ordeal. So maybe google does make some good hiring decisions after all[3].

[1] https://techcrunch.com/2011/08/03/google-please-hire-matthew...

[2] https://news.ycombinator.com/item?id=2840233

[3] https://techcrunch.com/2011/09/07/google-fails-to-hire-the-g...

That is a good and necessary thing in order to create a company. If you’re used to obeying rules (especially unwritten ones) you’ll never get off the ground in the first place.

> If you’re used to obeying rules (especially unwritten ones) you’ll never get off the ground in the first place.

I know plenty of people who "get off the ground" by playing by the rules. I'd love for you to re-read your comment again and tell me that it doesn't sound dogmatic.

Of course it’s a general statement and doesn’t represent 100% of instances.

But it’s generally true. Find me a billion dollar company started by someone who follows all the rules.

Wegmans immediately comes to mind.

Slack? Atlassian? Salesforce.com? HubSpot? Spanx?

Find me anyone who follows all rules.

Maybe draw the restriction back a bit, there.

Hah I wrote a much longer comment that essentially winded up being just this. Following all the rules is way too restrictive. Everyone speeds or breaks some traffic law at some point. Def need some criteria.

That’s the point of PG’s statement...

I know? I wasn't denying that.

I've made a lot of money off their stock so it immediately comes to mind - Atlassian. The only things I can think of are how they maneuvered around Australia's tax stuff, but they didn't go full on into tax havens like other companies have been accused of doing. They just went towards the U.K. And people have issues specifically with their products like Jira, but none of that relates to rules or ethics.

What rules did companies like Atlassian not follow?

Someone got downvoted below for saying multiple things. One being not to always follow unwritten rules. Yet from what can be gathered about Loopt, it seems like it wasn't acquired for legit purposes. Loopt was failing, had common investors with the acquiring company, was acquired, and promptly shut down.

I'd think most people would say something that seems like cronyism is an unwritten rule of what not to do. Yet that's a [big] part of Sam's legacy, no? Of course I'm assuming things about the Loopt acquisition, but it never did look right.

Success isn't really measured by the lack of negative outcomes but more like the sum of all outcomes, both negative and positive.

If we were to look at only the lack of negative outcomes, a "company" that has 14 users that like the service would be a greater success than, e.g. Facebook, which isn't really how we use the "success" in conversation.

It's interesting that I can't think of any of these megagrowth tech startups that have gone off without a hitch.

Doing anything in the real world is hard. Some military sayings come to mind:

"No battle plan survives contact with the enemy."

"Sometimes, a 90 percent solution now is better than a 100 percent solution later." (Meaning you could all be dead if you dick around looking for something too fussily perfect.)

"You got to break a few eggs to make an omelet." (This is a saying about training deaths. They happen. Get over it. It is worse to not train them or to make training too sissified and safe and not enough like actual battle conditions.)

Trouble isn't inherently a problem, and aligning this with VCs model of exiting either through being acquired or IPO'ing dumps the risk off onto someone else at whatever point it is decided that is best (for the company and some of its shareholders).

because it is a cost benefit analysis.

they received $583,000,000 and an amazing valuation by LYING. They would have received exactly $0 by not being so compelling.

they pay $1,000,000

they still get to be a unicorn success story that everyone aspires for. deal

Slack? Stripe? Instacart? Docker? Twitch? Mixpanel? Doordash? Gusto? Coinbase?

I isn't too surprising is it? Companies are made up of people and people are made up of complex psychologies.

Something startups do is the they take people who may have very little experience at the senior level and thrust them up there into the limelight. That is contrasted with people who come up through the ranks of a large company, adjusting along the way to the norms of corporate behavior and the company's notion of right and wrong.

I am fascinated by the lack of repercussions for investors. I had thought GroupOn and Zynga would have taught people the risks but no such luck.

Here's the relevant SEC document: https://www.sec.gov/litigation/admin/2017/33-10429.pdf

Zenefits paid a fine for misleading investors (with some contribution from the founder). The company is financed by investors, so in other words they indirectly paid the fine for being misled. Ironic?

That is sort of the joke about all securities litigation. Shareholders will often sue companies that experience price drops due to "misleading investors" and, as you mentioned, the fine or damages end up being paid for by the investors themselves.

This is a recurring theme in Matt Levine's Money Stuff.

One thing that I occasionally mention around here is that every bad thing a public company does is also securities fraud: If you did the bad thing and didn't first disclose it to shareholders, then they can claim to have been defrauded by your failure to disclose it. (If you did the bad thing and did first disclose it to shareholders ... why?)

https://www.bloomberg.com/view/articles/2017-08-22/stock-buy...

It's true that there is some overlap between the shareholders at different times, but there is some difference too. You can think of the shareholders that bought in cheaply after the price drop as compensating the shareholders that bought before the price drop and sold after. It's not clear to me whether this is a benefit to society.

This is why (some) Theranos shareholders have agreed to not sue.

"Under the terms of the agreement, which contained no admission of liability, all Series A, B and C investors had the right to receive an increased equity stake in Zenefits in exchange for the investors releasing all claims against the Company. The increased ownership was effectuated by allowing such investors to exchange shares of Series A, B and/or C stock for a new series of Series A-1, B-1 and C-1 stock with a higher conversion rate of preferred shares to common, which had the effect of diluting the ownership of the other classes of existing shareholders (Founders Preferred Stock and Common Stock), including Conrad. Following the settlement, Zenefits had an implied post-money valuation of approximately $2.0 billion, down about 56% from the original valuation." [1]

Value was re-allocated from founders and employees to investors.

[1] https://www.sec.gov/litigation/admin/2017/33-10429.pdf § 46

In addition to the fine, the SEC notes that the founder lost $65 million dollars as a result the drop in price and compensating early investors for that drop.

This seems like a pretty strong example in favor of the idea that the SEC doesn't need to do much to protect investors in private companies, because they tend to be more sophisticated (better at protecting themselves).

Is this a sarcastic comment?

Url changed from https://techcrunch.com/2017/10/26/sec-fines-zenefits-nearly-..., which points to this.

Since when did Buzzfeed cover business news?

Reply on news.ycombinator.com