WeWork’s CEO Makes Millions as Landlord to WeWork
wsj.com
wsj.com
The entire image and “vibe” of this guy / his team is supposed to be an egalitarian re-invention of the status quo. The kibbutz story. The “community adjusted EBITDA.” The rebranding to “We.” But this sort of real estate self-dealing isn’t a We move, it’s a Me move. And thus, we find ourselves facing a bigger issue that is far more troubling if you’re a shareholder or employee (and somewhat enjoyable if you’re a competitor): the emperor has no clothes and the CEO is full of shit. He is self-serving and isn’t optimizing for the benefit of those around him.
As others in the tech industry are only beginning to figure out, once your curated narrative dies and the reality of who you really are comes to the surface, an unstoppable cycle of “bad press” and “negative sentiment” emerges. That’s a hard cycle to work out of, especially if the value of your company is predicated on your image / the image of the company. Hiring Obama’s speech writer and lobbying Congress doesn’t fix the underlying issue, and eventually you’re living in a Reverse Metcalf’s Law situation that’s scaling in the wrong direction.
As WeWork is built on an image of selling “a new, better way of working” to companies of all sizes, it becomes extremely problematic if people start to associate the brand with “the rich keep getting richer, and they’re screwing us over and working us to the bone along the way.” An image of a “collaborative enterprise” becomes a laughable fantasy novel next to the reality of, “we are funded by third world despots and our CEO is lining his pockets with as much of our money as possible, while scheming up ways to do petty things such as avoid paying the cleaning staff any sort of decent wages or benefits.”
This isn’t the We Company. It’s the Me Company. That’s not very innovative. That doesn’t foster greater productivity. And eventually, a lot of tenants aren’t going to pay for it, because it seems a lot of them really think they’re paying to be part of a progressive, futuristic environment. If their smartest and most progressive employees start telling them they don’t want to visit the office, they’re going to get rid of that office. Companies’ desire to please their knowledge workers — what originally drove WeWork’s success — thus ends up killing it.
We're not at WeWork because of hype, or the image of the CEO, or anything like that. We're at a WeWork because it's a cheap/easy way to get an office, that we can scale when the company grows with minimal issues since it's month to month. We shopped around a few competitors, WeWork happened to be the best combination of price vs. space vs. availability, so we went with that.
I haven't exactly done a poll, but I doubt that most WeWork customers know or care about WeWork's culture too much - they just need an office, and WeWork is providing a cost-effective solution. Maybe it's artificial because of VC money - if so, I certainly don't care - it'll be good while it lasts!
For contrast: at my previous company, we also wanted to move to an office (instead of working out of my apartment). We spent a huge amount of time looking at offices, and ended up staying put, because it was hard to find a decent office with a decent price, and signing up for a 2-year lease is a huge commitment which is not fun to make when you don't know the future size of the company - do you get lots more space than you need and pay extra? Do you get less space and are in a tough spot if you grow too fast?
Where is WeWork month to month? Yes the open plan area is month to month, but the instant you try to get a private room they want you to sign a 6 month commitment.
I have not gone to ones in the US, though. This is outside the US. Are they truly, genuinely cancel-any-time month to month? Or "yeah it's month to month but if you cancel before 6 months is up you have to pay 50% of the remaining months"?
There is some variation between offices though, so entirely possible you had a different experience.
The fact that no one can actually do real work at a WeWork was just icing on the shit pie.
I guess it's good if you like to meet people. Not so much if you need a quiet space to work.
In this case, the free beer might be an intentional way to take "loud room I can't work in", to "laid back atmosphere I feel home in". The latter is false, but it's not as bad as being stuck with "loud room I can't work in".
Disclaimer: I work in a private office in a London WeWork and the free beer is a nice to have, even if it wasn't a consideration while picking an office.
This is all just marketing. It's like believing all the actors in a commercial really are elated and blissful just because they chose the right brand of soda.
Like a luxury alcohol makers, they are selling identity, not chair by hour.
But I think it's very important to remember that companies can have moral standards and follow them. Many companies don't sell-out in crucial ways, and throwing one's hands up and condemning them all is punishing the ones that stay true.
I think moral outrage is a very important and effective market force. It will do things our government never could, like take down facebook. I'm glad we have this tool.
I agree, which is why I criticize shallow analysis of a company's motivation based on its skin-deep marketing veneer.
In this case it's not even moral standards - the implication is that WeWork's CEO is neglecting his fiduciary duty to maximize shareholder value by lining his pocket instead.
That's in fact a corruption of capitalism, it's illegal, and he can be sued for that by shareholders.
> I think moral outrage is a very important and effective market force.
I completely agree, which is why it's important to look beyond the marketing.
If a company can breach standards of morality and decency, but get away thanks to some 30 seconds commercial featuring smiling kids, then we will not be effective as a public in enforcing those very real consequences that companies should face for their actions.
There is marketing of product and then marketing of company and then marketing of person/people. Not only does each have varying levels of truth, but each also has varying types of intent. The later in SV seems designed to encourage beliefs about a person or company that are immune to facts that counter them.
Branding it as marketing starts, to me, to sound like a convenient cover for propaganda.
It is not ascertained by buying into the shallowest outer layer of its marketing veneer.
It’s pathological. WeWork, Google, Facebook and all the rest don’t need to shaft their cleaners, catering staff, security guards etc. The cost is a rounding error and it’s directly antithetical to their stated brand values. But they just can’t help themselves.
The comments on that article? Mostly something along the lines of "maximizing shareholder value" and "fiduciary duty to the corporation". Anything to avoid having to admit that this is wrong.
> Short term mentality and spreadsheet driven management has taken a toll on the American dream.
Yes, but stock market growth since the '80s is a big reason why the "wealth" of the average American has increased, even though wages have stagnated and debt has increased. One hand has been feeding the other for a long time.
Of course, all this is in the name of "security" and the least-privilege thing. It's horse shit really. You need to be able to trust your employees and then audit. But it's easier to manage people when you can just lock them into a position and leave them there to rot.
It’s only fitting that the owner would also be full of shit.
For every person shouting about crushing it and hammering back booze there are another handful quietly getting on with their work, happy to have an office space with stable, fast internet, clean, stocked kitchens, 24 hour access and clean, comfortable spaces - where they don't have to worry about sorting bills and contracts, cleaners, etc etc etc.
A couple of examples. Friends in Pasadena have an office that could fit 6 comfortably, 8 less so. $1300 a month. Guy at WeWork 1 block way, $1100 a month for an office just big enough to fit one desk.
A "hot desk" in Tokyo is $490 a month where as at my co-working space my dedicated desk is $400 a month. That includes "fast internet", meeting rooms, printers, copiers, cheap snacks, receptionist, networking events, cleaners, open 24/7 etc... The rent 3 person private office for $1k where as WeWork a single person private office is $1100.
They claim "coffee". Hardly seems like coffee is work $1k a month. Besides, there's probably 11 craft coffee places withing a 3 minute walk of my office.
And it's not an exception, there's been an explosion of co-working / shared office spaces in Tokyo over the last 2-4 years.
The great thing about instant coffee is that you don't even need hot water to make it. I've found that it mixes up great with cold water in one of those protein drink shakers with the little springy balls.
This is awesome because there's no heat or hot water in the storage unit I'm renting. That's a subject for another post, but I just need a parka and a pair of fingerless gloves to get the exact same experience as those co-working hipsters. Plus, I'm not subjected to the torture of an open plan office. My unit is in the basement, and it's dead quiet.
I'm sitting here, only five subway stops away from the fancy WeWork downtown, laughing my ass off at the startup bros high-fiving and "crushing it". I've got a way better experience, and all in I'm saving like $100-200 per month over those hipster bros.
Your startup business probably does not require couches, stocked kitchens, and wi-fi. It needs a mailing address, a phone number, a website, and a way for people to pay you. Those folding tables from Costco will still be useful after you can afford real desks.
Which should tell you something's up with their finances.
As part of an investment round for WeWork in 2014, he was
granted Class B shares that gave him 10 votes per share,
and now he has more than 65% of the overall share vote,
according to WeWork corporate filings.
[0]- https://www.sec.gov/news/speech/perpetual-dual-class-stock-c...
So when WeWork responded with
-"The board is aware of it and has approved it"
they probably meant
-"Neuman is aware of it and has approved it" right ?
For example, by saying he has "special" shares that grant him 10x the votes of "normal" shares, he can sell way more than 50% of the company and retain 100% control.
This means shareholders are 100% along for the ride, and get no say in how he runs the business.
I could see a strong argument for the SEC coming down hard and saying "Okay, enough is enough. 1 share, 1 vote."
"Buyer beware" doesn't absolve a practice of being, at the very least, scummy.
Problems such as the one mentioned in this article start occurring when multi-class share schemes start allowing the founder to effectively sell off most of the company while still retaining total control.
Do you think Mark Zuckerberg's children should retain majority control of Facebook after he dies?
1. How divorced the financial markets are from the real economy.
2. How broken all our voting systems are.
Choose your narrative.
2008 didn't substantively re-tether the financial markets to the real economy.
Governance mechanisms are beginning to crack.
Also, there is a Ponzi-like aspect to VC funding in general, where incentives favor ever-rising valuations rather than the cultivation of sustainable, profitable businesses.
Certainly this is not a natural or easy problem, it requires a values analysis of our goals and principles. But if we truly want the market to evaluate a company, we must ultimately allow that market to change the fate of a company. The dual class shares prevent that, which I agree should be listed differently or restricted.
For example, if dual class shares were always subject to a confidence vote by the other shares once per 5 years, this is fine. Or you say that after 20 years the dual class must be dissolved. Allow the use for initial listing, but not forever. I think the author of the linked speech painted a very good picture of this.
Why would a WeWork object to paying Neumann's rent? WeWork is bascially Neumann anyway! Why would Tesla object to buying Musk's other companies? Tesla is basically Musk anyway! Why wouldn't levandowski just employ his own company to supply components he was procuring for Google? Why wouldn't Shkreli pay his hedge fund investors back with cash from one of his other companies?
It's amazing how often 'innovation' and business success turns into corrupt self-enrichment. Unfortunately justice tends to only come once someone suitably senior gets screwed. With Levandowski that was Google, with Shkreli that was the government. I suspect with WeWork the law suits will come the second the investment value drops - investors won't do a thing until they start losing money, rather than just making less money than they otherwise would have.
MG Rover: https://insolvencyandlaw.co.uk/why-didnt-insolvency-service-...
BHS: https://www.theguardian.com/business/2018/mar/27/philip-gree... / https://www.theguardian.com/business/2017/feb/28/philip-gree...
Maplin: https://www.taxresearch.org.uk/Blog/2018/02/28/40831/
(fundamentally in a capitalist society that recognises no moral restraint on money and it's not illegal ... why not? Surely you take as much money from the investors as you can and pocket exactly as much as you can get away with without being prosecuted? Anything less would be economically inefficient! /s)
There's nothing inherently capitalist about corruption. It's a property of power, not capitalism.
Worth mentioning, Smith was primarily concerned when anyone had an unfair market advantage that would ruin the state of equilibrium.
It seems that the most persistent problems we face often are. We can change our system of economic organization and politics but in the end the system is made up of individuals. Individuals who have all the same sort of flaws and who struggle with their human nature. It takes a lot of will and effort for a person to behave honestly and ethically. The interaction of peoples behaviors and the system they are in is a two way street.
I guess what I am saying is that we need to do the hard work of behaving better ourselves if we want to make our industry, community etc a better place.
I think it's only fair to judge the entire reality surrounding an economic system.
Same as any other system which allows largely unchecked power.
That's the same argument that says "USSR/DDR/Cambodia/NK/etc was no real communism".
We might excuse a few diversions from a political/economic system, but after some point, like with anything else, capitalism is what capitalism does time and again.
A key differentiator between the two is perhaps those that complain about capital gains tax effectively "taxing them twice". oho, you are also the company?
Capitalists are also concerned about conflicts of interest.
Anything less would be economically inefficient! /s)
Smart, far-seeing capitalists are able to see beyond mere legalities. Too much cronyism makes capitalism less efficient, because it starts to resemble centrally planned economies.
A smart, far-seeing capitalist realizes this is a collective action problem, and knows that there is no incentive not to practice cronyism as an individual.
They aren't choosing between having cronyism and not having cronyism... they are choosing between having cronyism and not participating or having cronyism and participating.
This is exactly the argument that Marxist made. They weren't going to let traditional middle class morality hold them back, they had history on their side and new what was ultimately best for society. They had real examples where trashing norms and moral codes ultimately worked for the best, such as overcoming a restriction on vivisection to cure a horrible disease. Or ignoring FDA regulations to get a helpful blood test to market. The argument can always be made. It just tends to end badly.
Arthur Koestler wrote about this a lot in Darkness in Noon.
> Too much cronyism makes capitalism less efficient, because it starts to resemble centrally planned economies.
Can you give an example of 'central planning' in the modern world that wouldn't also apply to large businesses that operate at scale, like agribusinesses or mining?
I.e., no one running a company today
Thankfully she sees the writing on the wall and is about to get her CPA and bounce, and I'm going to laugh when it all collapses around him because she's basically running the firm, but lawyers have a racket so you can't do profit sharing with the non lawyer plebs (by law) like paralegals so she gets a fraction of the pay to do most of the work while he lives the high life, which is exactly what imploded the old firm!
It's a bit more nuanced.
You ought to watch out for your SO and this fella :P
In his autobiography, Benjamin Franklin relates how he found himself as a government official for the colony of Pennsylvania and then proceeded to hire his own printing shop whenever his office needed to publish a widely circulated document or pamphlet.
BTW, that autobiography is a great read. you can find it for free on Project Gutenberg: http://www.gutenberg.org/files/20203/20203-h/20203-h.htm
It would be brilliant to see an analysis of how commonplace this and other types of corruption were historically and geographically.
When you see countless companies get looted and crushed by private equity takeovers, to the point that middle schoolers can predict with accuracy when a company will vaporize, you get analysts with nonsensical stories about turnarounds, etc.
But when self-dealing management use the company to enrich themselves in a way that is at best ethically questionable, you don’t hear too much.
Once mutual funds and pension funds start investing in WeWork, then I’ll care.
There's also a variety of complications, from pension funds that do invest in VC funds, to national security implications of foreign principals funneling investments to individuals. You also have disruptive market behavior if we allow the boys with access to VC capital the ability to do whatever, while publicly traded real estate trusts need to meet regulatory requirements that prohibit that type of activity.
there is a good chance that pension funds have already invested in WeWork, directly or indirectly. Where do you think the money is coming from? The VCs aren't putting in their own money.
“all is mine which is not nailed down and nothing is nailed down that can be pried loose.”
Cultures, laws and traditions aren't set in stone and can be changed. If society and culture simply look the other way and the media simply rehash press releases, then the day will come when acting like this becomes the norm.
A CEO being the landlord strikes me as a big potential conflict of interest. For example, if the company needs to move to a larger space to grow, the CEO might want to delay to avoid losing income. Perhaps the company might have a prospective buyer who'd want to relocate everyone to their campus. In that case, there would be an external incentive for the CEO not to make the deal.
Why wouldn't levandowski just employ his own company to supply components he was procuring for Google?
The way this used to work, is that the employee would become aware of a market need because the current company had that need and would be a great customer, so the employee spins out her own business, then leaves to run it.
So how is this different than WeWork's CEO owning the building and leasing it to WeWork?
He's essentially acting like Ray Kroc.
• 20 year minimum lock-in for franchisee.
• A monthly service/royalty fee based on a percentage of the restaurant’s gross sales (currently 5%).
• A monthly rental being a fixed base rent and a percentage of the restaurant’s gross sales
• A monthly advertising contribution of not less than 4% of gross sales.
• All Outgoings including rates and utilities.
Also a metric butt-tonne of start-up costs.
Chairman of the board (the former CEO) just approved a $5.2 billion deal of some sort from EHL, the fund he is the owner and manager of.
Perhaps he's operating on a level we can't comprehend
To me, this smells like American culture just being corrupt.
EDIT: typo
It's also worth noting that the US maybe 20 years ago was somewhat exceptional when it comes to conflicts of interest. In other cultures, personal relationships and personal vested interests that we would consider "corrupt" are a load-bearing part of the social structure. So perhaps we're reverting more to the global mean on this point.
It was common knowledge that the "corporate art" on the walls of the buildings was owned by various members of the "C-Suite" and leased back to the company.
Don't even get me started on the private loans given to members of the C-Suite and Board then subsequently "forgiven".
I used to rage about it every time they published their financials.
Also Tesla is not named Musk, or Amazon, Bezos.
(a) you have FU money
(b) you'll get to keep having FU money (perhaps drastically less, but still FU money) whatever you try
Then you don't have "skin in the game" anymore like a normal person does.
If Bezos fortune goes from 100 billion to 5 billion due to bad bets, he still hasn't suffered anything more significant than some damage to his ego (meanwhile Amazon employees could see their lives and finances ruined).
(And yes, the real world is not a fictional caricature.)
The shareholders do mind, because these actions may violate the CEO's fiduciary duty to act in their best interest. They can sue him for violating said duty.
Less relevant in WeWork's case, but very relevant in Tesla's case, since it's a public company, and in fact Tesla and Musk have been sued for neglecting their duties before:
https://www.reuters.com/article/tesla-musk-lawsuit/tesla-ceo...
Yeah, and how well is that going to work out for them? They should have known better than to invest in this company in the first place; companies like that are cults of personality. It's like investing in Sears under Eddie Lampert; you have to be a moron to put your money into Sears stock when it's obvious the guy is solely working to drain as much money out of Sears and into his own bank account as possible. And a lawsuit, even if you win, isn't going to net you much money.
So you are saying the investors (who are the current shareholders) stupidly bought into Neumann personality cult.
So now they are paying for their idiocy.
This isn't some failure of capitalism: it's the failure of large, wealthy, sophisticated investors to properly assess their own investment.
Other very successful companies that have/had a single person that basically runs the whole place as their own company are Berkshire Hathaway, Apple, Oracle, Microsoft, Amazon. The top five American companies by market cap are of this type. I would not say the this is such a bad thing as these people are looking out for the companies long term future. Compare HP before and after the founders left. Hewitt and Packard would not have focused the company around the evil idea building disposable printers that lock people into overpriced ink purchases. If society needs these huge corporations (maybe we would better of with out them?), I would much rather they be run by a single human than be a soulless bureaucracy with a figurehead at the top.
If Neumann fully owned WeWork, it would not be corrupt self enrichment to own the properties, just vertical integration. If the investors want them to work this way, is it really corrupt? I wouldn't think so.
I'm not a big fan of HP, and I especially abhor the inkjet printer business, but I'd like to point out there's more to HP (and even their printers) than this. Their business printers are still pretty good AFAICT.
My simple rule when contemplating a printer purchase: "do not ever, ever, ever buy an inkjet printer".
And in the case of successful founders, even without a controlling stake, just their reputation makes it harder to go against the CEO. Could anyone on the board have challenged Gates or Steve Jobs 2.0? In the modern era, who would challenge a decision by Bezos or Hastings?
Check Carlos Ghosn's ongoing story for example
Don't forget Michael B. Rothenberg:
>The SEC’s complaint alleges that over a three-year period, Rothenberg and his firm misappropriated millions of dollars from the funds, including an estimated $7 million of excess fees, which Rothenberg used to support personal business ventures he claimed were self-funded and to pay for private parties and events at high-end resorts and Bay Area sporting arenas.
Of course, the founder is living meagerly like most educators (including the ones he employs or the one's he's taking funding away from)… wait, no, he's raking in the cash.
That said, BASIS provides an excellent environment for students that are compatible with its education model (read: students who would have been successful anywhere).
To paraphrase James Madison, the Senate ought to protect the minority of wealthy owners from the majority. Deference to wealth and ownership is in the DNA of the country.
America is a tacit caste system, heavily indoctrinated to believe it's a freer place than it is. While there's a stronger guarantee of freedom of speech/expression than other countries, who owns our time/effort is rarely ever discussed and the realities of it questioned. The owners do, of course, and direct it to their desires.
Which shows that outcome is not all that matters, legally.
How did get get the money to buy that building - if he is siphoning money from WeWork revenues and using that, that's illegal I suppose. If he used Wework stock options as collateral to finance the building, that could be some grey area I guess.
CEOs have a fiduciary responsibility to the other stakeholders of their companies. That's the problem here.
I'd rather this was the case completely -- privately owned, extensions-of-oneself companies and we had no BS like boards and stockholders...
100% with you here.
When companies grows so much ego becomes part of the game.
I think it goes beyond that, by people viewing whole states as such extension
Fortunately, most people are not sociopaths, but unfortunately most of these people will not achieve the successes you described.
Isn't business defined as enrichment of the shareholders?
So (depending on who owns the shares) it really shouldn't be amazing, right?
This is not someone who has a strong history of "the right thing to do".
It's a great way to shunt some money from the company treasury to your private wallet, which is otherwise impossible to do (except for dividend payments, but those are limited and go to all shareholders and not just to you).
It's absolutely a robber baron move.
Instead you would get there by first crushing a competing business, as you would in most scenarios anyway. Then you would buy all the worthless stock you could with your meager salary. Finally you could make an outrageously overpriced buyout offer for the worthless business.
18EU is probably my favourite. Feels epic, but plays remarkably quickly.
They aren't your run-of-the-mill Euro game you pull out after Thanksgiving Dinner and teach to the family over coffee.
Also very confusing for shareholders. CEO not motivated to find more affordable options.
Once you get to a level where you have financial decision making power, don't pick a provider (even a great one, even at a competitive price) if you have a meaningful financial interest in them. The incentives are all wrong and it leads to badly run companies. In this particular case, it's so far over the line, it's pretty bad.
The board might not be able or want to force him out right now, but long term the tone has been set.
...for companies that are structured as public companies.
If your companies are all private, with no investors, go ahead and do whatever you like. It's all just your money, (or your family's money), anyway.
But to do that with money from public investors is, and this is only my opinion, but I think it's extremely unethical. Obviously the issue is that there is nothing explicitly illegal about what people like the WeWork CEO are doing. I'm not sure why?
"The veil of liability protection provided by an entity may be pierced based on the following theories:
Alter Ego Theory. If you run your company as little more than your “alter ego,” as a mere extension of yourself (this will generally be the case where there is a lack of separateness between you individually and the company itself, due to commingling of funds, lack of proper governance, and other factors)."
1 https://businessattorneyinaustin.com/llc-corporation-liabili...
That's why this stuff is legal, because it by definition, is NOT an alter ego situation. My point is that while it is not illegal, it is definitely unethical, and probably should be illegal. Not because of the doctrine of Alter Ego, which is obviously not violated in these sorts of instances. But rather because all of these corporations, while acting independently, are clearly acting in concert to benefit a third party that is NOT the general shareholder class. There is no explicit, sort of generic, law against that right now.
As I said, if your companies are private, do whatever you like in this regard. All of your companies can, and probably should, concert to benefit you and your family. I'm just saying for companies with public investors, that's just not cool.
Not sure why you say that. This seems to be textbook self-dealing, which is illegal under Delaware law (where WeWork is incorporated) unless the self-dealing party can demonstrate fairness: http://www.sgalaw.com/news-and-views/2014/11/24/self-dealing...
There's nothing wrong with the current "arrangement", but there might be a lot wrong with the way the arrangement came to be.
Or said another way, there aren't any ethical issues with WeWork renting a building from one of the owners in an above-board lease arrangement. The way WeWork chose that building and reevaluates its lease may have some issues.
Is that improper?
A real dick move for sure. They were growing at the time and being constrained to such a tiny space for so long was quite rough for them.
This not only denied the church any revenue from making the parking lot a parking garage as the museum did but prevented them from doing anything else with the land in case of expansion or simply a future sale if they move. Talk about stepping over dollars to pick up pennies.
Given that WeWork is also a very unprofitable business it raises serious fiduciary duty questions regarding his role at WeWork (it would be a big issue even if they were profitable but seems crazy bad when they are not).
I'm amazed. When does this information about self-leasing show up in due diligence by investors? The prospect of return to the investors must overshadow such data? Is the real-estate market just so inflated at the moment that if you can play it why not do so?
The self-leasing strategy + WeWork makes the property value higher (presumably because the rent-ability of the property is proven when a WeWork tenant moves in). Then the property owners can leverage the property. Others have raised the point of conflict of interest and fiduciary responsibility and the not-so-sound financials of the business (e.g. Softbank backs down from $16B to $2B in new investment (still a big number)). I'm curious what is going on here or is it obvious?
Although it sounds bad, not sure how it is perceived in real estate
Rent on self-owned is definitely higher than market price. It has to be for the transaction to make sense.
Company rents office from other company, you can have as many companies as you want.
You generally couldn’t, for example, transfer significant wealth to a friend without high taxes by selling them something for a dollar When it’s market value is $10 million. This issue here is completely different.
Ripe for abuse if McDonald’s were too short term focused.
Source: https://www.fool.com/investing/general/2016/04/03/what-perce...
"The Company owns and leases real estate primarily in connection with its restaurant business. The Company identifies and develops sites that offer convenience to customers and long-term sales and profit potential to the Company. To assess potential, the Company analyzes traffic and walking patterns, census data and other relevant data. The Company’s experience and access to advanced technology aid in evaluating this information. The Company generally owns the land and building or secures long-term leases for conventional franchised and Company-operated restaurant sites, which ensures long-term occupancy rights and helps control related costs."
"The Company owned 45% to 50% of the land and 70% to 75% of the buildings for restaurants in its consolidated markets at year-end 2017 and 2016."
Here's why this article is an opinion piece searching for scandal that fails to reveal one:
Consider the legal definition of "self-dealing": "One important duty of a fiduciary is to act in the best interests of the benefited party. When a fiduciary engages in self-dealing, she breaches this duty by acting in her own interests instead of the interests of the represented party. For example, self-dealing occurs when a trustee uses money from the trust account to make a loan to a business in which he has a substantial personal interest. A fiduciary may make such a transaction with the prior permission of the trust beneficiary, but if the trustee does not obtain permission, the beneficiary can void the transaction and sue the fiduciary for any monetary losses that result."[1]
Every decision WeWork made to lease new commercial space was made with board support. The CEO and family members conducted deals with WeWork that he or family personally benefited by, but it was done in a transparent manner and with board support.
WeWork is navigating uncharted territory. This makes those working in finance apprehensive. Underwriters have certain requirements that a borrower must meet before a loan is approved. A rapidly expanding, growth-oriented business like WeWork may not qualify to lease new space as quickly as it requires. However, perhaps individuals who pledge their own collateral might. Commercial space was leased by individuals (or other entities) and then re-leased to WeWork.
I could be wrong about this case, but if I am then this will likely grow into a scandal and self-dealing will be revealed.
[1] https://legal-dictionary.thefreedictionary.com/Self-Dealing
History reveals that the list of bad and/or outright illegal corporate decisions made with board support is long.
So was every decision Theranos made...
I've seen this happen in multiple cases, and I find it highly unethical. At the very least it means the CEO is raking in thousands of dollars a month in credit card points for purchases across the entire company.
Maybe the question should be, why the hell Neumann bought properties directly instead of using the WeWork vehicle?
We all know the answer to that I think.
When the 2010's documentary gets made and they get to the section about the start-up world unraveling and being exposed, it's gonna be Theranos, Fyre and WeWork highlighted throughout. 2019 is perfect timing.
Neumann is assuming the capital risk. Does WeWork and its investors (including Neumann!) want these assets and associated liabilities on its books? Probably not. Is Neumann making money from this transaction long term? No way to tell; he himself probably doesn't even know if these deals are profitable for him now.
What he is definitely doing is increasing his levered bet on WeWork, which could be good or bad for WeWork, and good or bad for him, depending on how everything turns out.
The problem with this is that as CEO, he's talking about someone else's money (investors) while the other side he's talking about money in his pocket.
How can there not be a conflict of interest?
I think the legit thing to do would be to have three companies. SuperCo Holdings, SuperCo RealEstate and SuperCo Operations. SuperCo Holdings owns both the others 100% and investors buy the Holdings company.
Yeah, you gotta be extra careful that it's not divergent from company interests (right place, right price). But this isn't shady unless there is some reason it harms the company.
It would be his business if he rented out his property to an organization that he can't sign contracts for. But as it stands, he is transferring money from an account he only partially owns (but fully controls, with legal obligations to his co-owners which he seems to be breaking) to an account that he owns fully. It's a sneaky way to give himself a raise that is easier to get past the board. The article even cites WeWork with "approved by the board or an independent committee", which implies that not all of those arrangements happened worth explicit board approval. How he got into the possession of the means by which the transfer from controlled-but-only-partially-owned to owned was facilitated is an unrelated topic.
I didn't read the full article (paywall), but it sounds like the CEO owns the building with other people. Are those owners also large shareholders of WeWork?
Another interesting aspect of this is that he can basically insider trade with impunity since real estate isn't a security. Who knows when/where WeWork will open an office next? Well, he does, and can buy a place cheaply (I don't imagine WeWork presence affects the real estate price much, but in principle it could).
That's the conflict of interest. WeWork shareholders want WeWork to build a great business and eventually IPO, but it maybe better for him personally if WeWork simply grows as fast as possible at any cost by doing things like signing expensive leases it can't make the unit economics work for.
A lot of people hop on the band-wagon of bashing "rent-seeking", mostly misusing the term in the process, confusing rent-seeking with leasing/renting land or capital. WeWork's whole business is built on renting as far as I can tell.
At this point the CEO has a conflict of interest: on the one hand, he should move the location, because that's best for WeWork; on the other hand, he should keep it where it is because that's best for his real-estate company.
There are many potential conflicts but that's probably the easiest to use as an illustration.
Devil's advocate: Conflicts of interest are absolutely everywhere and can never be avoided completely. For example, here's a conflict of interest in my own job: I want my employer to pay me as much money as possible, and my employer wants to pay me as little as possible.
And if I were a manager/director/executive, I would want to hire as many people as possible to boost my stature. And the company would want to hire as few people as possible to keep their expenses low.
The fact that a conflict of interest exists, isn't in itself a irreconcilable problem. It only becomes one if one party tries to hide it from the other, and deceives them to get what they want. Presumably that isn't happening at WeWork.
If you're an investor in WeWork, I can understand your concern, and your wanting your board representatives to take a close look at these agreements. From what I hear though, the investors and board of directors are all perfectly happy with the arrangements that have been made. Perhaps a little less soapboxing from the peanut gallery is in order.
Just form the Wyoming Series LLC or BVI segregated portfolio company, no beneficial owner information will be in public records, but even the state and registered agent can be kept in the dark if you want.
I expect value has been extracted this way for centuries.
Oops!
I have to admire Neumann’s balls in trying to play Mohammed bin Salman for a chump. But I don’t think this will end well for him.
- Unicorn status. Check.
- Douchey founder(s). Check.
- Shady dealings and corruption. Check.
>"Mr. Neumann owes his personal wealth largely to sales of WeWork stock. It is unclear how much WeWork stock he has sold, but he has told some friends it is in the hundreds of millions of dollars."
Honest question - are investors OK with this? Isn't he essentially enriching himself with VC money that has yet to see a return realized?
Couldn't this be seen as a hedge that even if investor loose their shirts he himself has managed to enrich himself with a real-estate portfolio?
It saved their butts when a partner they took on tried to take over their very valuable company.
I don’t see the problem unless there’s obvious overpricing, corruption, or failures to disclose. At some point it makes better sense to put property under a holding company or similar.
I imagine the company could also find cheaper places/better terms for leasing than the CEO owned properties which, to me, is mismanagement if not low-level fraud.
Landlords may have been asking him to personally guarantee leases.
Perhaps, but as someone else in this thread said
>The self-leasing strategy + WeWork makes the property value higher (presumably because the rent-ability of the property is proven when a WeWork tenant moves in). Then the property owners can leverage the property.
And never mind the fact that he's basically guaranteeing he has a tenant for each building, that will also likely making physical improvements to lure in customers (which will mostly carry over for a future tenant) and effectively building free equity in the property so even if WeWork suddenly folds he can sell the properties at competitive prices and still walk away with a profit.
>Landlords may have been asking him to personally guarantee leases.
Perhaps with the first location or two but a quick google search shows they've raised billions in funding which would be more than adequate (unless they are growing too fast, which appears to be the case, see below).
Now as far as guaranteeing rent here's something interesting
>In March 2018, SEC filings indicated that WeWork had raised over $400 million alongside private equity fund The Rhone Group to start a fund to purchase properties directly.[33] In April, documents filed by the company in association with a plan to raise $500 million through the issue of high-yield bonds showed that the company's revenues rose in 2017, but costs rose faster, and the company owed $18 billion rent
https://en.wikipedia.org/wiki/WeWork#History_and_funding
I don't know how many of the sites he owns but even if it is only 10% there is 1.8 billion 'free' money servicing loans on commercial properties he owns.
Edit: Fred Wilson attributes it to John Doerr - https://avc.com/2010/04/no-conflict-no-interest/
You're only just seeing an article on this behavior because a high profile tech company is doing it rather than a factory or a shop.
Companies always try to hire people from our network first - relatives, friends and friends of friends. Suddently it is bad.
woah, they were so backwards in 60s
-looks at the tech industry:
oh no"
"Yes it really does seem like a conflict of interest! “A WeWork spokesman said all related-party deals are reviewed and approved by the board or an independent committee and disclosed to investors,” so that is good, but on the other hand, “Mr. Neumann, the 39-year-old executive who founded WeWork in 2010, is WeWork’s largest individual shareholder and has voting control over the company,” so it is not clear that the board can say no. (He got that control in 2014 with some super-voting stock; before that, he once tried to do a related-party deal and got turned down by the board.)
"One thing I will say, though, is that if you told me that a privately owned real estate company was engaging in transactions with its controlling shareholder and CEO that raised possible conflicts of interest, I would be like “ha, yeah, that’s the real estate industry for you.” Conflicts of interest are more common there, as everyone knows these days after years of stories about Donald Trump’s business dealings, and it is not surprising for a founder/controller/CEO to be involved in a deal with his company on multiple sides and in multiple ways. Private tech startups, on the other hand, tend to be a bit more pristine. They are not complex moneymaking structures for their founders but mission-driven enterprises where everyone’s incentives are ostentatiously and lavishly aligned: If the company gets big, the founder becomes a zillionaire; if not, he walks away with only his modest salary and a track record for failing ambitiously. WeWork is a weird company because it is a real estate company that thinks it’s a tech startup; it seems to have the culture and New-Age-y patter and grandiose ambition and valuation of a tech company. But what if, deep down in its heart, it really is a real estate company?"
What risk? He's already pocketed the profits. If WeWork defaults, his property management company takes the loss, possibly sells the property, and perhaps files for bankruptcy. It doesn't affect his personal finances.
"Risk" has become cognitive poison. There can be, and often is, a huge divide between _financial risk_ and _risk of grave personal consequences_.