WeWork Co-Founder Has Cashed Out at Least $700M Via Sales, Loans
wsj.com
wsj.com
Maybe he would later sell those real estates whose price have been inflated because of WeWork's presence.
It is indeed a real estate company.
If it’s true, that’s not a good look for him or the company.
> One of the landlords behind the building was no ordinary owner: It was Adam Neumann, WeWork’s chief executive, who leased the property to WeWork after buying it, according to people familiar with the situation.
> Mr. Neumann has made millions of dollars by leasing multiple properties in which he has an ownership stake back to WeWork, one of the country’s most valuable startups. Multiple investors of the privately held company said the arrangement concerned them as a potential conflict of interest in which the CEO could benefit on rents or other terms with the company.
They both expanded a marginally profitable (and hard to grow) business by expanding a few locations than leveraging the capital to buy real-estate, which allowed them to stop caring about the original and individual franchised business success. Using the massive income of being commercial property landlords, even if the franchises failed, they had revenue growth. Now that Kroc is gone, the reference to McDonald's as a corporation is convenient, since the history is understood and available.
The movie "The Founder" might clear things up.
Just googling the history, so you can understand what happened, is a minimum when having a discussion about history. Whoever went so far as to wasting a point downmodding me, didn't even do that.
Who owned the real estate? Ray Kroc?
According to https://www.moaf.org/publications-collections/financial-hist... Franchise Realty Corp was owned by McDonald’s.
From wikipedia: At the closing table, Kroc became annoyed that the brothers would not transfer to him the real estate and rights to the original San Bernardino location
Regardless of the legal agreements, the intent was the same. Since the beginning of this thread, it looks like nitpicking to avoid concession, so you can believe what you want. GL with that.
To recap, history. Ray Kroc is analogous to Adam Neumann. 2 founders who leveraged real-estate over the initial franchise business. Substituting McDonald's in name for Ray Kroc is a matter of a temporal situation (or laziness).
Adam Neumann, who controls WeWork, set up a scheme where Adam Neumann and relatives bought real estate and leased it to WeWork (no franchise model in this case, by the way). The intent was for Adam Neumann to benefit. The analogy is flawed and misleading, the conflict of interests is evident and this anomalous situation is being corrected.
A much better analogy to what McDonald’s did in the beginning is what WeWork intends to do now: https://www.bloomberg.com/news/features/2019-05-15/wework-wa...
“WeWork is creating an investment fund that aims to raise billions of dollars to buy stakes in buildings where it will be a major tenant”
(Still, it’s not exactly the same, I think, as it will be a fund partially owned by WeWork and partially by external investors; I don’t fully understand what was the structure for Franchise Realty but as far as I understand external investors provided loans to that corporation.)
The movie The Founder is mostly fake. It's unlikely to clear much up.
In the case of WeWork, this isn’t a franchise, WeWork has the ability to own the property outright and lease it out. The CEO owning the property effectively guarantees him a good return on his investment and his rent profit goes into his pocket while WeWork the company passes him the profit.
If there are holes in the logic please elaborate. That is the best I can compare the two.
I’m sure McDonald’s makes a bit of profit off of leasing to a franchisee, although I can’t say. In the case of McDonald’s it seems it is providing a valuable service to a franchisee. No need for a franchisee to try to negotiate property deals, nor put up real estate capital to own the land. McDonalds is effectively cutting out a 3rd Party landowner middleman that could arbitrarily raise rent once the restaurant is opened.
Compare to Subway, which also franchises but doesn’t lease property, to see what difference that makes.
McDonalds is a much stronger company just based on their ownership of some of the most valuable real estate across the USA.
It is not in the movie (which, again, is largely fictitious) that Ray Kroc took personal ownership of properties, and benefitted personally from the corporation he controlled (not counting the above-board appreciation-of-the-overall-corporation, which of course he benefitted from, but capitalists mostly don’t argue with this).
There was an intermediary acting as the owner, and there are no franchisees in WeWork’s case.
WeWork is vastly, vastly more sketchy.
"Multiple investors of the privately held company said the arrangement concerned them as a potential conflict of interest in which the CEO could benefit on rents or other terms with the company."
Mr. Neumann "is WeWork’s largest individual shareholder and has voting control over the company, so it is not clear that the board can say no."
https://www.bloomberg.com/amp/opinion/articles/2019-01-16/we...
This quote reminds me of something that was said in the movie The Founder (2016).
https://www.imdb.com/title/tt4276820/
(Spoiler alert, possibly.)
“You’re not in the hamburger business. You’re in the real estate business.”
Clearly an ethical guy we're dealing with here. I'm sure this will all pan out well down the road.
Seriously where’s the vetting VCs are supposed to be doing? Used to be you had to hustle AND have a good idea to have a VC ready company. Now it seems like all you need to do is hustle and be in the tight geographical location (Sillicon Valley) and you will get money for stupid things like this damned Coworking company with free beers.
It’s standard practice to buy a building personally and rent it back to your own company. It’s what accountants recommend you do.
It's also not unusual for some larger companies to have their head office owned by the founder / majority shareholder in a separate company, Monsoon and Arcadia in the UK are two examples of this
See also: https://techcrunch.com/2017/06/01/the-meeting-that-showed-me...
Maybe these things are exactly what happen everywhere and I'm just applying a perception of corruption-as-usual.
https://arstechnica.com/information-technology/2012/10/how-s...
That sounds like a recipe for disaster.
But yeah, big money doesn't have to be very smart, in principle. Like this pitch, 45 minutes for $45B dollars from the Saudi prince: https://www.economist.com/business/2019/03/23/masayoshi-son-...
This article has another good quote:
> The stockmarket, for its part, values SoftBank itself at a steep discount to the sum of its listed constituents (see chart 1), despite a $5.5bn share buy-back in February. Worries that Mr Son is paying over the odds are thought to be a big factor. Take WeWork: when Mr Son slashed his investment to $2bn, SoftBank’s shares leapt by 6%.
It seemed even more ingenious/mischeviois, because in exchange for franchise deal they leased land to franchisers, not even the parent company. So they didn't milk their company.
Im not sure if thats the whole of mcd corporation income structure, but the movie hinged on this one.
Hope I didnt spoil too much, there's more to the picture anyways.
https://www.theglobeandmail.com/news/british-columbia/vancou...
That's not really "cashing out". The portion of your shares that you've sold, sure, but leveraging investments is just an option that's available once you hit a certain point and it just makes sense to take advantage of it.
EDIT: To the replies, your home and publicly traded stock can be valued and are semi-liquid. WeWork stock is not in the same class of asset.
It's no more "funny money" than me taking out a HELOC against my own house. WeWork clearly is worth >0% of its current mark-to-market, so as long as the bank picks a good ratio of loan-to-asset-value (10% of a 1B asset? Maybe), it's a decent risk for their loan capital.
Someone who built up that much wealth, even on paper? Every single bank will want to lend him money, at competitive rates. He's going to need / want debt for life to do future deals, even after his WeWork days. You want to be the preferred bank to that person.
Banks would much rather lend out $100m than $1m 100x, as it takes a lot less effort. Hence they like these clients. I think you'd be surprised on the terms he got on those loans.
The more money you need, the easier generally it is to do a deal.
And if they are giving excellent rates, it makes you wonder if they really have such a surplus of money that they can't find enough good risks to loan smaller amounts to at much higher rates.
I think it's more, as you mentioned, getting in the good graces of someone that is going to be wealthy the rest of their life.
In all honesty, small businesses are super high risk. This is generally lower risk, because the legal / due diligence / etc will have been done better. Also the likelihood of plain fraud is less.
It's a combination of both. At the end of the day, there are always things that need to be financed. That's whether you're worth a million or a billion. So might as well build up a good relationship. It's easier to establish those relationships with big accounts, but it's also a more competitive environment (so you need to give good rates and not waste time with bullshit offers -- like they often do in retail).
I don't think that's at all clear. They own very little, so what they are "worth" is largely in the form of goodwill. They already have a lot of debt, and the viability of the company for the near future hinges on their ability to continue take on more debt. There are multiple plausible scenarios where the company's value goes negative, including the debt markets turning against them for reasons specific to WeWork or for some more global reason.
Using the controlling share of a company that's planning to IPO in less than six months? That's a bit more unusual. It makes you wonder about the terms, or fuels your imagination with who's fronting the cash for something that risky and what types of situations justify it.
NY Times might say you "lost $700M" though, to sell some newspapers. Almost no benefit in explaining unless you want the law to get changed - which would benefit nobody.
And sure, the loan is not taxed. But the money that ends up being used to pay back the loan will have had to be taxed.
The big question is real estate because most coffeeshops are already maximizing their space so you’d be limited to the bigger ones.
https://www.congressrentalusa.com/equipment_rentals_sales/in...
Softbank is basically setting its own valuations because of the amounts it has to invest.
Wework has a ton of red flag.
Softbank is a major wework investor.
Could I short softbank?
How much would you like?
(There was a smart quote saying the same, can’t find it)
Though there is some evidence that the quite (like many) is apocryphal.
"...the stock market can remain irrational a lot longer than you can remain solvent."
From the outside it looks like another Theranos waiting to happen.
https://www.axios.com/wework-doubled-revenue-loss-2018-eec75...
Its easy to point fingers at rich people, but this seems like a fairly logical cash-out.
More stakeholders means more legitimacy.
The concern is that he's cashing out a large $ amount ($700 million) before the IPO, more than he needs to live, which may signify that he values the cash now over holding the stock. Which is not a good look considering the IPO is trying to get people to trade their cash for stock.
47 billion is a lot for an app startup, but if they owned say 40 billion in property, it's a lot less of a stretch...
EDIT: This article claims they own no property at all:
https://www.ie.edu/exponential-learning/blog/finance/wework-...
https://thereformedbroker.com/2019/06/13/when-everything-tha...
Though the growth stocks have traditionally been tech with high margins, or massive markets, it's interesting to see with an eventual IPO if WeWork will fit into this narrative, or if investors will see through that.
After initial signup, which includes charging your credit card, they force you to enter your personal information, your company information including company contact and phone number, and at least one skill on their list of approved professional skills before you are allowed to cancel.
The case that was described to me: a travel company paying around $100k pa for intelligence on travel related startups in residence- they use the data to determine rate of growth and strategic threats so they can either compete, ignore or make an offer to these new businesses.
If we work isn’t monetising their business intelligence then they would be leaving a lot on the table
I was in wework in sydney at the time and re read our t&cs, my reading was that they could probably do the same but it wasn’t explicit, and if they were they were being sloppy about it (ie they knew my headcount because we had to get passes each time, but there wasn’t a strong program of engagement to find out what each business did, just get on with your work).
This other space I reference actually had people in regular contact with the businesses habiting the space, in order to connect with industry, government grants and other programs etc, so it actually bridged the space a bit more between a coworking space and incubator (without being any specific program)
The fact that WeWork sits on certain personal information, but NO information on past jobs, network, etc, should tell you enough.
The only competition is a company with Amazing paternity leave that would really suit my skill set and life style.
But at 700M the founder, his children and his children's children can live a life of luxury and will never need to work again.
That seems like it's a little beyond hedging the normal startup risks.
https://www.investopedia.com/investing/importance-diversific...
I would guess this is super high beta (overall market exposure). When the next downturn comes we'll see if they have the capital to survive the credit event.
whether that pays off for investors is another story
Sounds like the trickle was patched up.
I don't care if what he did was legal, or if it benefitted him as a capitalist. It's unethical, and makes us all question the value of the WeWork ecosystem.